The Companies Act 2013 vis a vis Amendment to the chapter (Sections 128 to 138)
Introduction:
The Companies Amendments Act 2017 covers by and large a wider spectrum of The Companies Act 2013. Cursory studies of the amendments will high light three broad categories-
- Certain amendments involve omission of existing provisions,
- Certain amendments are new additions and
- Certain other amendments are substitution of existing provisions.
Some of the Amendments are cosmetic or clarificatory in nature. But, there are other Amendments with reference to section 132 that deals with imposing of penalty by NFRA in case of professional or other misconduct proved,-- separately for individuals as distinct from firms.
Since the chapter IX deals with Accounts Of the Companies, the amendments relating to the Chapter is covered in this article with all the attention it deserves especially when it mainly relates to accounting and auditing community with their obligation and duties hovering around them.
Section 129(3) of the Act, for the first time deals with consolidated financial statement, earlier to this; it was primarily under the discipline and control of SEBI guidelines - more connected to listed companies.
The section in the primary Act reads as follows 'Where a company has one or more subsidiaries, it shall, in addition to financial statements provided under sub-section (2), prepare a consolidated financial statement of the company and of all the subsidiaries in the same form and manner as that of its own which shall also be laid before the annual general meeting of the company along with the laying of its financial statement under sub-section (2):
Provided that the company shall also attach along with its financial statement, a separate statement containing the salient features of the financial statement of its subsidiary or subsidiaries in such form as may be prescribed:
Provided further that the Central Government may provide for the consolidation of accounts of companies in such manner as may be prescribed.
Explanation-for the purposes of this sub-section, the word 'subsidiary' - shall include associate company and joint venture'
Part played by the Amendment under section 129(3):
To be precise, in section 129(3) of the primary Act, for the purpose of consolidation, all the subsidiaries are only mentioned. But, only in the explanation to this sub - section, it clarified 'the word subsidiary shall include Associates and Joint ventures. This created an avoidable apprehension as to whether Associates companies are to be consolidated but clarity is given in the Rule No 6 of Chapter IX on 'Accounts of companies’ and in subsequent amendments to the rule.
In the Amendment Act 2017, by elevating Associate companies into the main structure of sub section (3), it makes it abundantly clear that associates are at par and also included for the purpose of consolidation, besides subsidiaries.
What about joint ventures which were mentioned in the explanation to the primary Act that is now conspicuous by absence in the sub section?
Manner of consolidation of accounts- Rule 6 of Chapter IX:
Even before this amendment to the section 129(3) of the Act, the rule 6 of Chapter IX had undergone multifarious changes at various points of time.
The consolidation of financial statements of the company shall be made in accordance with the provisions of Schedule III of the Act and the applicable accounting standards:
Provided that in case of a company covered under sub-section (3) of section 129 which is not required to prepare consolidated financial statements under the Accounting Standards, it shall be sufficient if the company complies with provisions on consolidated financial statements provided in Schedule III of the Act.
What are the relevant applicable standards?
- Indian Accounting Standard i.e., Ind. AS 110,Consolidated Financial Statementsprovides that where an entity has control on one or more other entities, the controlling entity is required to consolidate all the controlled entities. Since, the word 'entity’ includes a company as well as any other form of entity, therefore, LLPs and partnership firms are required to be consolidated.
- Similarly, under Accounting Standard (AS) 21, as per the definition of subsidiary, an enterprise controlled by the parent is required to be consolidated. The term 'enterprise’ includes a company and any enterprise other than a company. Therefore, under AS also, LLPs and partnership firms are required to be consolidated.
Section 129 (3) of the Companies Act, 2013 as stated earlier(before Amendment 2017) provides that where a company has one or more subsidiaries, it shall prepare a consolidated financial statement of the company and of all the subsidiaries. Further, an Explanation to this sub section in the earlier avatar provided that the word 'subsidiary' shall include associate company and joint venture.
In view of the above, it is required to prepare consolidated financial statements for its associate and joint venture in accordance with the applicable Accounting Standards, viz, AS 23,Accounting for Investments in Associates in Consolidated Financial Statementsand AS 27, Financial Reporting of Interests in Joint Ventures, respectively. This may hold -water even after this amendment where subsidiary/s and associate/s are heralded to main subsection, even whence the crucial Explanation I mentioned above is removed.
Amendment Rules 2014/2015/2016-a walk through to recapitulate:
Again, 'provided further nothing in this rule shall apply in respect of preparation of consolidated financial statements by a company if it meets the following conditions:-
(i) it is a wholly-owned subsidiary, or is a partially-owned subsidiary of another company and all its other members, including those not otherwise entitled to vote, having been intimated in writing and for which the proof of delivery of such intimation is available with the company, do not object to the company not presenting consolidated financial statements;
(ii) it is a company whose securities are not listed files consolidated financial statements with the Registrar which are in compliance with the applicable Accounting Standards.. or are not in the process of listing on any stock exchange, whether in India or outside India; and
(iii) its ultimate or any intermediate holding company files consolidated financial statements with the Registrar which are in compliance with applicable Accounting Standards
Provided also, nothing in this rule shall apply in respect of consolidation of financial statement by a company having subsidiary or subsidiaries incorporated outside India only for the financial year commencing on or after 1" April, 2014 and ending on the 31st March, 2015, in case of a company which does not have a subsidiary or subsidiaries but has one or more associate companies or Joint ventures or both, for the consolidation of financial statement in respect of associate companies or joint ventures or both, as the case may be."]
Section 130 on Re-opening of account on court's or Tribunal’ order:
The Amendment gives clarity as to the period of re-opening, since the section is not vocal, since unspoken on this. The Amendment is limiting to Eight years preceding a financial year with a caveat as to a company in existence for less than eight years whence entire period is covered. It is in line with Section 128(5).
As per the first proviso to sub section (1),the Court and Tribunal as the case may be, shall give notice to the Central Government, the Income-tax authorities, the Securities and Exchange Board or any other statutory regulatory body or authority concerned to consider their representations, if any, made by them. The Amendment seeks to extend this to 'other persons concerned also' for reason obvious.
Section 132 on Constitution of National Financial Reporting Authority:
Sub clause (c) of sub section 4 deals with imposing of penalty by NFRA in case of professional or other misconduct proved separately for individuals as distinct from firms. The Amendment is only related to imposing of penalty in case of a firm. The minimum penalty if proved is reduced to Rs. 5 lakhs from Rs. 10 lakhs though maximum penalty is retained in the case of firms.
For Individual there are no changes.
If any person is aggrieved by any order of NFRA, may prefer an appeal to Appellate Tribunal (Earlier Authority) in such manner on payment of such fees as may be prescribed.
The Sub sections (6), (7), (8) and (9) are deleted.
Section 134 Financial Statement, Board reports:
Earlier, the CEO is required to sign the financial statement only if he is a Director of the company, post amendment, the CEO shall sign the Financial statement whether he is appointed a Director or not. Section 134 (3) (1).
Earlier form MGT -9 (EXTRACT OF ANNUAL RETURN as on the financial year ended on ….) formed a part of Board report. Post Amendment, a link to the annual return posted on the Web site is to be provided. Sub section 134(3)(a)
Further, proviso is added after sub clause (q) that inter alia eschews repetition in the Board report.
'Where disclosures referred to in this sub-section have been included in the financial statements, such disclosures shall be referred to instead of being repeated in the Board's report.
Further where the policy referred to in clause (e) or clause (o) is made available on company's website, if any, it shall be sufficient compliance of the requirements under such clauses if the salient features of the policy and any change therein are specified in brief in the Board's report and the web-address is indicated therein at which the complete policy is available."
Though the above Amendments are relief of repletion in the Board Report, as part of audit responsibility, the auditors have to see whether these are complied with. In fact, whether MR letter should cover this is to be considered.
A New Section 134 (3A) is introduced by which the Central Government is empowered to prescribe an Abridge Board report of a Small Company and One Person Company.
Section 137 'Copy of financial statement' to be filed with Registrar:
After the fourth proviso of sub section (1), the following proviso shall be inserted, namely:- 'Provided also that in the case of a subsidiary which has been incorporated outside India (herein referred to as "foreign subsidiary"), which is not required to get its financial statement audited under any law of the country of its incorporation and which does not get such financial statement audited, the requirements of the fourth proviso shall be met if the holding Indian company files such unaudited financial statement along with a declaration to this effect and where such financial statement is in a language other than English, along with a translated copy of the financial statement in English.'.
Conclusion:
Though a number of amendments are made at different points of time to the Rule 6 in Chapter IX on Accounts of Companies as has been essayed earlier, the section 128(3) has been amended to rope in associate/s in the main stream of the subsection that had originally mentioned subsidiary/s only though the explanation to the subsection that clarified 'the word subsidiary shall include Associates and Joint ventures. Now that Explanation is given goodbye in the amended version of sub- section (3) leaving in the lurch the joint venture/s. But, as has been spelt out earlier, the relevant Standards both under Ind.AS and AS will take care of the situation to stitch the consolidated Accounts. The institute may have to step in to clarify or MCA has to come forward with a credible rule to move forward. This is more so required when there is only joint venture without any subsidiary or associate in between. As an abundant caution, one may go for consolidation but a lead in the form of clarity is a must, especially in relation to a situation when there is only joint venture with no subsidiaries/ associates in between
The amendments to the other sections in the chapter are by and large in the nature of clarification or simplification.
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