Introduction: The Board of Directors is an important body elected by the shareholders which acts as agent of shareholders. The Board is collectively responsible for making policies for good governance and efficient running of the company. The Companies Act, 2013(hereinafter referred as” the Act or New Act”) enhanced the accountability and responsibilities of directors by clearly defining their duties and responsibilities, qualification of independent directors and mandating certain disclosures such as evaluation of performance of board, CSR policy, whistle blower mechanism, risk policies etc in the Directors report. This article focuses on the legal requirements and contents of Directors report as per New Act.
Significance of Directors’ report: Directors report together with complete financial statements and auditors report are sent along with notice of Annual General meeting to members of the company {Section 134(7)}. These reports as a bunch are popularly known as Annual reports are considered to be one of the best means used for apprising the shareholders about the performance of the company, market scenario, its subsidiaries. Director’s report also reflects the standard of corporate governance and efficiency of directors in conducting the business.
Legal frame work under Old Act or CA 1956:
Many of the requirements under the Old Act remain the same for preparing a directors report but for some new compliances which are added. Therefore it would be useful to refer to Section 217 of CA1956 which mandates that Directors report shall deal with or disclose the following information:-
a) State of the company’s affairs
b) Amount, if any, proposed to be carried to reserves
c) Percentage of Proposed dividends, if any
d) Material changes and commitments, if any, which affect financial position of the company in between the year end and the date of directors report
e) Explanation to qualifications, if any, in auditor’s report
f) Particulars of employees drawing specified remuneration and particulars of conservation of energy, technology absorption, foreign exchange earnings and out go in the manner prescribed, if applicable
g) Significant changes in the nature of business or businesses in which company or its subsidiaries have an interest
h) Particulars of employees drawing a specified remuneration
i) 217 (2AA) requires directors to give Directors responsibility statement confirming that:
- compliance with applicable accounting standards , deviations, if any
- consistency in adoption of accounting policies to reflect true and fair view of financial statements
- Maintenance of Accounting records for safeguarding assets and preventing frauds
j) In addition to the above, Listed companies have to attach a Corporate governance report as per Clause no.49 giving details such as composition of board, audit committee, subsidiary companies, disclosures and other useful information to shareholders.
Legal frame work under CA2013:
A. Changes at a glance:
New Act has introduced disclosure of additional information such as, extract of annual return {Section 92(3)}, Explanations to adverse qualifications in Secretarial audit report, statement on declaration given by independent director, if any {Section (149)},policy on directors appointment, qualifications, remuneration etc, particulars of loans, guarantees and investments.{Section 186},Particulars of related party transactions{Section 188(1)},Steps taken as per CSR policy approved by the Board… etc.
B. Contents of Board’s report(Section 134)
1. Section 134(3) states that Board’s report shall be attached to financial statements laid before the shareholders for adoption. It also mandates that such board’s report shall disclose or deal with the following:-
a) the extract of the annual return as provided under sub-section (3) of Section 92(This is a new requirement)
b) number of meetings of the Board.( It is covered earlier by CG report under clause no.49 of listing agreement in the case of listed companies)
c) Directors’ Responsibility Statement (corresponding to Sec. 217(2AA) of old act).
d) a statement on declaration given by independent directors under sub-section(6) of section 149.(New requirement)
e) listed companies and such class of companies as may be prescribed section (section178(1) must disclose company’s policy on directors’ appointment and remuneration including criteria for determining qualifications, positive attributes, independence of a director and other matters provided under section 178(3)
f) explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made
· by the statutory auditor in his report; and
· by the company secretary in practice in his Secretarial audit report {Section 204(3)}(New requirement)
g) particulars of loans, guarantees or investments under section 186 (New requirement)
h) Particulars of contracts or arrangements with related parties referred to in sub-section (1) of section 188 in the prescribed form. Rule no.9.10(2) says that such related party transactions must be reported in the prescribed Form no.9.5(New requirement)
i) the state of the company’s affairs
j) the amounts, if any, which it proposes to carry to any reserves
k) the amount, if any, which it recommends should be paid by way of dividend
l) material changes and commitments, if any, affecting the financial position of the company which have occurred between the end of the financial year of the company to which the financial statements relate and the date of the report.
m) the conservation of energy, technology absorption, foreign exchange earnings and outgo. Rules 9.10 (3) specifies the manner in which these are to be reported. For eg., in case of conservation of energy steps taken its impact, use of alternative source, investment in equipment etc. similarly foreign exchange earned and spent (inflow and out flow) must be reported. Similarly details of technology absorption, foreign exchange earnings & out go are to be reported
n) a statement indicating development and implementation of a risk management policy for the company including identification therein of elements of risk, if any, which in the opinion of the Board may threaten the existence of the Company. Earlier listed companies were reporting under clause no.49 (New requirement)
o) the details about the policy developed and implemented by the company on corporate social responsibility initiatives taken during the year.(New requirement)
p) in case of a listed company and every other public company having paid-up share capital of 25 crores or more, a statement indicating the manner in which formal annual evaluation has been made by the Board of its own performance and that of its committees and individual directors(Rule no.9.10(4). (New requirement)
q) Such other matters as may be prescribed. Rule no.9.10 (5) gives an indication of those matters.
· financial summary/highlights;
· change in the nature of business, if any,
· Details of directors or key managerial personnel who were appointed or have resigned during the year(New requirement)
· Names` of companies which have become or ceased to be its Subsidiaries, joint ventures or associate companies during the year along with reasons therefore
· Details relating to Deposits covered under Chapter V of the Act namely a) Accepted during the year (b) remained unpaid or unclaimed as at the end of the year(c) whether there has been any default in repayment of deposits or payment of interest thereon during the year and if so, number of such cases and the total amount involved, orders passed by Regulators or courts or tribunal which impact the companies operations in future.
2. Directors Responsibility statement (DRS}:
It is necessary to make a specific mention about significance of this statement. DRS gives assurance to shareholders. However it thrusts huge responsibility on board not only to frame proper policies, internal financial controls but also to ensure their implementation,
Directors have to confirm that:
a) Applicable accounting standards have been followed with explanation for any material departures
b) Selected accounting policies have been applied consistently to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit and loss of the company for that period.
c) Proper and sufficient care has been taken for the maintenance of adequate accounting records for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities
d) The annual accounts are prepared on a going concern basis; and
e) In the case of a listed company internal financial controls laid have been followed by the company and that such controls are adequate and are operating effectively. Explanation clarifies that such controls means policies and procedures adopted and adherence by the company for orderly and efficient conduct of the business for safeguarding assets, prevention and detection of frauds and errors and maintenance of accounting records and timely preparation of financial statements and review its efficacy(New requirement)
f) the directors had devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively(New requirement). This will ensure legal compliance in all area of companies operations.
3. Other Disclosures/ requirements:,
· In case of revision of/re opening of financial statements or Board report, detailed reasons must be stated in the director’s report for such revision of statements or directors report.{ Section 131(1)(third proviso)}
· Board’s report shall disclose the composition of audit committee and reasons for not accepting recommendations of audit committee, if any{Section 177(8)}
· Report on establishment of vigil mechanism.{Section 177(10)}
· Secretarial audit report in prescribed form shall be annexed to Board’s report as per Section 204
· As a good practice certain disclosures have been appearing as common in all directors’ reports. These are…..
1)“Directors liable to retire”,
2)Appointment or cessation of directors,
3)“Reappointment of auditors and remuneration” etc.
4. Authentication of Board’s report:
Board’s report and annexures forming part of it shall be signed by the Chairperson of the company, if he is authorised by the Board, if he is not authorized, it shall be signed by at least two directors, one of whom shall be a Managing Director. {Section134 (6)}. Section 134(1) also specifies the manner of signing of financial statement also. Financial statements must be signed by chairperson, if authorised by the board or by two directors, one whom shall be MD and CEO of company and in addition to this Secretary and CFO should also sign(if appointed)
5. One Person Company: In case of one Person Company, the requirements are simplified. If it contains replies or clarifications to adverse comments of Auditors and board’s report is signed by director if there is one.
C. Penalty for non compliance:
For any violation of provisions of Section 134, the company shall be punishable with fine which shall not be less than Rs.50,000/- but it may extend to Rs.25 lakhs and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 3 years or with fine which shall not be less than Rs.50,000/- but such fine may extend to 5 lakhs or with both.
Conclusion:
Drafting a Directors report under the New Act will be a challenge to the Company Secretaries as the scope of the Report has been widened. Enlarged scope of Directors Responsibility statement(DRS) casts a huge responsibility on the Board of directors as they are required not only to confirm about framing of prudent polices and internal financial controls but also adherence to policies and compliance of all applicable laws for safeguarding interests and assets of company. Let us hope that Audit committees and good professionals will come to Directors’ rescue so that contents of DRS can be confirmed effectively.
G S Rao,
Tags: Board’s Report, Directors Report, Annual Report,The Companies Act, 2013
Disclaimer: This article contains interpretation of the Act and personal views of the author are based on such interpretation. Readers are advised either to cross check the views of the author with the Act or seek the expert’s views if they want to rely on contents of this article.
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