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Accounts of companies
The Chapter IX of Companies Act 2013 contains the provisions of Accounts of Companies from Sections 128 to 138.

Accounts of companies

Accounts of companies

  • 08-February-2021
  • CA-Inter
  • By TeamKoncept
ACCOUNTS OF COMPANIES

Table of content


1. INTRODUCTION


There is a need for disclosing the annual information to the shareholders by the directors about the working and financial position of the company so that the shareholders are aware of the affairs of the company. The Companies Act, 2013, lays down various provisions related to maintenance of proper books of account of the companies.



2. BOOKS OF ACCOUNT, ETC., TO BE KEPT BY COMPANY [SECTION 128]

General requirement

Every company shall prepare books of accounts and other relevant books and records and financial statement for every financial year.

These books of accounts should give a true and fair view of the state of the affairs of the company, including that of its branch office(s)and explain the transactions effected both at the registered office and its branches

These books of accounts must be kept on accrual basis and according to the double entry system of accounting.

Accrual basis and double-entry system of accounting

Accrual basis of accounting is an accounting assumption or an accounting concept followed in preparation of the financial statements. Accrual concept is one of the four principles of accounting concepts, which involves recording income and expenses as they accrue; distinct from when they are received or paid.

Double entry book-keeping is a method of recording any transaction of a business in a set of accounts, in which every transaction has a dual aspect of debit and credit and therefore, needs to be recorded in at least two accounts. Double aspect enables effective control of business because all the books of accounts must balance.

“Books of account” as defined in Section 2(13) includes records maintained in respect of—
  • all sums of money received and expended by a company and matters in relation to which the receipts and expenditure take place;
  • all sales and purchases of goods and services by the company;
  • the assets and liabilities of the company; and
  • the items of cost as may be prescribed under section 148 (Cost Audit) of the Companies Act 2013 (“Act”) in the case of a company which belongs to any class of companies specified under that section.
“Book and paper” and “book or paper” as defined in Section 2(12) include books of account, deeds, vouchers, writings, documents, minutes and registers maintained on paper or in electronic form;

Place of keeping books of account

Section 128(1) requires every company to prepare and keep the books of account and other relevant books and papers and financial statements at its registered office.

Provided all or any of the books of accounts may be kept at such other place in India as the Board of directors may decide. Where such a decision is taken by the Board the company shall within seven days thereof file with the registrar a notice in writing in form AOC-5 giving full address of that other place.

Maintenance of books of account in electronic form

A company has an option of keeping books of account or other relevant papers in electronic mode as per Rule 3 of the Companies (Accounts) Rules, 2014. Rule 3 lays down the manner of books of account to be kept in electronic mode.
  1. Such books of account or other relevant books or papers maintained in electronic mode shall remain accessible in India so as to be usable for subsequent reference.
  2. The information contained in the records shall be retained completely in the format in which they were originally generated, sent or received, or in a format which shall present accurately the information generated, sent or received and the information contained in the electronic records shall remain complete and unaltered.
  3. The information received from branch offices shall not be altered and shall be kept in a manner where it shall depict what was originally received from the branches.
  4. The information in the electronic record of the document shall be capable of being displayed in a legible form.
  5. There shall be a proper system for storage, retrieval, display or printout of the electronic records as the Audit Committee, if any, or the Board may deem appropriate and such records shall not be disposed of or rendered unusable, unless permitted by law.
    The back-up of the books of account and other books and papers of the company maintained in electronic mode, including at a place outside India, if any, shall be kept in servers physically located in India on a periodic basis.
  6. The company shall intimate to the Registrar on an annual basis at the time of filing of financial statement following relevant information related to service provider—
    (a) the name of the service provider;
    (b) the internet protocol (IP) address of service provider;
    (c) the location of the service provider (wherever applicable);
    (d) where the books of account and other books and papers are maintained on cloud, such address as provided by the service provider.
Books of account - Branch Office

Where a company has a branch office in or outside India, it shall be deemed to have complied with the provisions of sub-section (1), if proper books of account relating to the transactions effected at the branch office are kept at that office.

The summarised returns of the books of account of the company kept and maintained outside India shall be sent to the registered office at quarterly intervals, which shall be kept and maintained at the registered office of the company and kept open to directors for inspection.

Inspection by Directors

As per Section 128 (3), any director can inspect the books of account and other books and papers of the company during business hours. Such inspection may be done by any type of director - nominee, independent, promoter or whole time.

The  proviso  to  sub-section  3  provides  that  a  person  can  inspect  the  books  of account of the subsidiary, only on authorisation by way of the resolution of Board  of Directors.

Assistance by officers and Employees

As  per  Section  128  (4),  where  an  inspection  is  made  under  sub-section  (3),  the officers and other employees of the company shall give to the person making such inspection all assistance in connection with the inspection which the company may reasonably be expected to give.

Other financial information: Where any other financial information maintained outside the country is required by a director, the director shall furnish a request to the company setting out the full details of the financial information sought, the  period for which such information is sought.

The company shall produce such financial information to the director within fifteen days of the date of receipt of the written request.

The Director can seek the information only individually and not by or through his attorney holder or agent or representative with respect to financial information maintained outside the country [Rule 4(4) of the Companies (Accounts) Rules, 2014].
 
Period for preservation of books [Section 128(5)]

The books of accounts, together with vouchers relevant to any entry in such books, are required to be preserved in good order by the company for a period of not less than eight years immediately preceding the relevant financial year.

In case of a company incorporated less than eight years before the financial year, the books of accounts for the entire period preceding the financial year together with the vouchers shall be so preserved.

As per proviso to sub-section 5, where an investigation has been ordered in respect of a company under Chapter XIV of the Act related to inspection, inquiry or investigation, the Central Government may direct that the books of  account may be kept for such period longer than 8 years, as it may deem fit and give directions to that effect.

Persons responsible and Penalty

As per Section 128 (6) the person responsible for the maintenance of books of account etc. shall be:
  1. Managing Director,
  2. Whole-Time Director, in charge of finance
  3. Chief Financial Officer
  4. Any other person of a company charged by the Board with duty of complying with provisions of section 128.
Penalty for contravention

In case the aforementioned persons fail to take reasonable steps to secure compliance, they shall in respect of each offence, be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees or both.

Example 1: XYZ Ltd. wants to maintain its books of account on cash basis. Is this a valid act of XYZ Ltd?

Answer: The Companies Act 2013 vide section 128(1) requires every company to prepare books of account and other relevant books and papers and financial statement for every financial year on accrual basis and double entry system of accounting. No exception has been given by the Act to any class or classes of companies from the above requirement. Hence XYZ Ltd. cannot maintain its books of accounts on cash basis.
 


3. FINANCIAL STATEMENT [SECTION 129]

Financial Statement — Definition
Financial Statement is defined under Section 2 (40), to include–


However, the financial statement with respect to one Person Company, small company and dormant company, may not include the cash flow statement.

Exemption: For private companies, the proviso to section 2(40) shall be read as follows:

“Provided that the financial statement, with respect to one person company, small company, dormant company and private company (if such private company is a start-up) may not include the cash flow statement;

Explanation  –  For  the  purposes  of  this  Act,  the  term  “start-up?  or  “start-up company” means a private company incorporated under the Companies Act, 2013 or  the  Companies  Act,  1956  and  recognised  as  start-up  in  accordance  with  the notification issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry.”

The exceptions, modifications and adaptations shall be applicable to a private company which has not committed a default in filing its financial statements under section 137 of the said Act or annual return under section 92 of the said Act with the Registrar.
 
Financial statement should be prepared for financial year and as per the requirements of Schedule III.

“Financial year” [Section 2(41)], in relation to any company or body corporate, means the period ending on the 31st day of March every year, and where it has been incorporated on or after the 1st day of January of a year, the period ending on the 31st day of March of the following year, in respect whereof financial statement of the company or body corporate is made up:

Example 2: Mahindra and Mahindra Company Limited was incorporated as a company on 22nd February 2014. Now for the purpose of the first financial statements, the period ending shall be 31st March of the following year i.e. 31st March 2015.

Provided that where a company or  body corporate, which is  a  holding company or a subsidiary or associate company of a company incorporated outside India and is required to follow a different financial year for consolidation of its accounts outside India, the Central Government may, on an application made by that company or body corporate in such form and manner as may be  prescribed, allow any period  as its financial year, whether or not that period is a year:

Provided further that any application pending before the Tribunal as  on  the date  of commencement of the Companies (Amendment) Ordinance, 2018, shall be disposed of by the Tribunal in accordance with the provisions applicable to it before such commencement.

Provided further that a company or body corporate, existing  on  the commencement of this Act, shall, within a period of two years from such commencement, align its financial year as per the provisions of this clause.

Schedule III has been amended vide Notification No. G.S.R. 404(E) dated 6th April 2016 according to which Schedule III has been divided into two divisions.

Division I deals with financial statement for a company whose financial statement are required to comply with the Companies (Accounting Standards) Rules, 2006.

Division II deals with financial statement for a company whose financial statement is required to comply with the Companies (Indian Accounting Standards) Rules, 2015.

True and fair view

As per section 129(1), the financial statements shall give a true and fair view of the state of affairs of the company or companies. It shall comply with the accounting standards notified under section 133 and shall be in the form or forms as may be provided for different class or classes of companies in Schedule III.

Provided that the items contained in such financial statements shall be in accordance with the accounting standards:

Non-applicability

Provided  further  that  nothing  contained  in  this  sub-section  shall  apply  to  any insurance or banking company or any company engaged in the generation or supply of electricity, or to any other class of company for which a form of financial statement has been specified in or under the Act governing such class of company:

Provided also that the financial statements shall not be treated as not disclosing a true and fair view of the state of affairs of the company, merely by reason of the fact that they do not disclose—

Type of companyMatters
Insurance of companyMatters which are not required to be disclosed by the Insurance Act, 1938, or the Insurance Regulatory and Development Authority Act,1999
Banking companyMatters which are not required to be disclosed by the Banking Regulation Act,1949
Company engaged in the generation or of electricity supplyMatters which are not required to be disclosed by the Electricity Act,2003
Company governed by any other lawMatters which are not required to be disclosed by that law

Note: The proviso to section 129(1) with respect to non-applicability states that merely because of the matters which are not required to be disclosed under the above given acts, in the financial statements of the above given companies, the financial statements of such companies shall not be treated as not disclosing a true and fair view of the state of affairs of the company.

Laying of financial Statements [Section 129(2)]

At every annual general meeting of a company, the Board of Directors of the company shall lay before such meeting financial statements for the financial year.
 
Consolidation of financial statements [Section 129(3)]

(1) Where a company has one or more subsidiaries or associate companies, it shall,  in  addition  to  financial  statements  provided  under  sub-section  (2), prepare a consolidated financial statement (CFS) of the company and of all the subsidiaries and associate companies in the same form and manner as that of its own and in accordance with applicable accounting standards, 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).

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 and associate company or companies in Form AOC- 1 as per Rule 5 of the Companies (Accounts) Rules, 2014.

Provided further that the Central Government may provide for the consolidation of accounts of companies in such manner as may be prescribed under Rule 6 of the Companies (Accounts) Rules, 2014.

Explanation -  For the purposes  of  this sub-section, the word “subsidiary” shall include associate company and joint venture.

Rule 6 of the Companies (Accounts) Rules, 2014 provides for the consolidation of accounts of companies in the following manner

Manner of consolidation of Accounts: 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.

In case where company is not required to prepare CFS: 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 of consolidated financial statements provided in Schedule III of the Act.

Exemptions from preparation of CFS: As per Companies (Accounts) Amendment Rules, 2016, preparation of consolidated financial statements by a company is not required if it meets the following conditions:
  1. 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;
  2. it is a company whose securities are not listed or are not in the process of listing on any stock exchange, whether in or outside India; and
  3. its ultimate or any intermediate holding company files consolidated financial statements with the Registrar which are in compliance with the applicable Accounting Standards.
Provided also that nothing contained in this rule shall subject to any other law or regulation, apply for the financial year commencing from the 1st day   of 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.

Explanation: The above proviso states that for a company which does not have a subsidiary or subsidiaries but has one or more associate companies or Joint Ventures or both will not be required to comply with this rule of consolidation of financial statements in respect of associate companies or joint ventures or both, as the case may be, only for the financial year commencing from the 1st day of April, 2014 and ending on the 31st day of March, 2015.

Provided also that nothing in this rule shall apply in respect of consolidation of financial statement by a company having subsidiary or subsidiaries incorporated outside India commencing on or after 1st April 2014.

(2) The provisions applicable to the preparation, adoption and audit of the financial statements of a holding company shall, mutatis mutandis, also apply to the consolidated financial statements [Section 129(4)].

(3) Without  prejudice  to  sub-section  (1),  where  the  financial  statements  of  a company do not comply with the accounting standards referred to in sub- section (1), the company shall disclose in its financial statements, the deviation from the accounting standards, the reasons for such deviation and the financial effects, if any, arising out of such deviation [Section 129(5)].

(4) The Central Government may, on its own or on an application by a class or classes of companies, by notification, exempt any class or classes of companies from complying with any of the requirements of this section or the rules made thereunder, if it is considered necessary to grant such exemption in the public interest and any such exemption may be granted either unconditionally or subject to such conditions as may be specified in the notification [Section 129(6)].

Penal provisions [Section 129(7)]

If a company contravenes the provisions of this section, the managing director, the whole-time director in charge of finance, the Chief Financial Officer or any other person charged by the Board with the duty of complying with the requirements of this section and in the absence of any of the officers mentioned above, all the directors shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.

Explanation: For the purposes of section 129, any reference to the financial statement shall include any notes annexed to or forming part of such financial statement, giving information required to be given and allowed to be given in the form of such notes under this Act.
 


4. RE-OPENING OF ACCOUNTS ON COURT’S OR TRIBUNAL ORDERS [SECTION 130]

This section seeks to provide for the re-opening of books of accounts and recasting of financial statements.

(1) Apply to court for re-opening of accounts—A company shall not re-open its books of account and not recast its financial statements, unless an application in this regard is made by-

(a) the Central Government,
(b) the Income-tax authorities,
(c) the Securities and Exchange Board of India (SEBI),
(d) any other statutory regulatory body or authority or any person concerned and an order is made by a court of competent jurisdiction or the Tribunal to the effect that—
  1. the relevant earlier accounts were prepared in a fraudulent manner; or
  2. the affairs of the company were mismanaged during the relevant  period, casting a doubt on the reliability of financial statements:
Serving of notice: Provided that the Court or the 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 or any other person concerned and shall take into consideration the representations, if any, made by that Government or the authorities, SEBI or the body or authority concerned or the other person concerned before passing any order under this section [Sub- section (1)].

(2) Revised accounts shall be final: The accounts so revised or re-casted, shall be final.

(3) Time Limit in respect of re-opening of books of account: No order shall be  made  under  sub-section  (1)  in  respect  of  re-opening  of  books  of  account relating to a period earlier than eight financial years immediately preceding the current financial year:

Provided that where a direction has been issued by the Central Government under the proviso to sub-section (5) of section 128 for keeping of books of account for a period longer than eight years, the books of account may be ordered to be re- opened within such longer period.
 


5. VOLUNTARY REVISION OF FINANCIAL STATEMENTS OR BOARD’S REPORT [SECTION 131]

(1) Preparation of revised financial statement or revised report on the approval of Tribunal: If it appears to the directors of a company that—
  1. the financial statement of the company; or
  2. the report of the Board,
do not comply with the provisions of section 129 or section 134, they may prepare revised financial statement or a revised report in respect of any of the three preceding financial years after obtaining approval of the Tribunal on an application made by the company in such form and manner as may be prescribed and a copy  of the order passed by the Tribunal shall be filed with the Registrar.

Explanation: Section 131 deals with the revision of financial statement or boards report, as the case may be, on a voluntary basis in the opinion of the board of directors unlike section 130.

Tribunal to serve the notice:

Provided that the Tribunal shall give notice to the Central Government and the Income tax authorities and shall take into consideration the representations, if any, made by that Government or the authorities before passing any order under this section.

Number of times of revision and recast:

Provided further that such revised financial statement or report shall not be prepared or filed more than once in a financial year.

Explanation: The above provision states that when a company has revised its financial statement or boards report pertaining to any of the three preceding financial years than such revised financial statement or boards report, as the case may be, shall not be revised again for the period it has been so revised.

Reason for revision to be disclosed:

Provided also that the detailed reasons for revision of such financial statement or report shall also be disclosed in the Board’s report in the relevant financial year in which such revision is being made.

(2) Limits of revisions: Where copies of the previous financial statement or report have been sent out to members or delivered to the Registrar or laid before the company in general meeting, the revisions must be confined to—
  1. the correction in respect of which the previous financial statement or report do not comply with the provisions of section 129 or section 134; and
  2. the making of any necessary consequential alternation.
(3) Framing of rules by the Central Government in relation to revised financial statement or director’s report: The Central Government may make rules as to the application of the provisions of this Act in relation to revised financial
statement or a revised director’s report and such rules may, in particular—
  1. make different provisions according to which the previous financial statement or report are replaced or are supplemented by a document indicating the corrections to be made;
  2. make provisions with respect to the functions of the company’s auditor in relation to the revised financial statement or report;
  3. require the directors to take such steps as may be prescribed.
 


6. CONSTITUTION OF NATIONAL FINANCIAL REPORTING AUTHORITY [SECTION 132]

(1) The Central Government may, by  notification, constitute the National Financial Reporting Authority (NFRA) to provide for matters relating to accounting and auditing standards under this Act.

(1A) The National Financial Reporting Authority shall perform its functions through such divisions as may be prescribed.

(2)
Not withstanding anything contained in any other law for the time being in force, the NFRA shall—
  1. make recommendations to the Central Government on the formulation and laying down of accounting and auditing policies and standards for adoption  by companies or class of companies or their auditors, as the case may be;
  2. monitor and enforce the compliance with accounting standards and auditing standards in such manner as may be prescribed;
  3. oversee the quality of service of the professions associated with ensuring compliance with such standards, and suggest measures required for improvement in quality of service and such other related matters as may be prescribed; and
  4. perform such other functions relating to clauses (a), (b) and (c) as may be prescribed.
(3) The NFRA shall consist of a chairperson, who shall be a person of eminence and having expertise in accountancy, auditing, finance or law to be appointed by the Central Government and such other members not exceeding fifteen consisting of part- time and full-time members as may be prescribed:

(3A) Each division of the National Financial Reporting Authority shall be presided over by the Chairperson or a full-time Member authorised by the Chairperson.

(3B) There shall be an executive body of the National Financial Reporting Authority consisting of the Chairperson and full-time Members of such Authority for efficient discharge of its functions under sub-section (2) [other than clause (a)] and sub- section (4).

Provided that the terms and conditions and the manner of appointment of the chairperson and members shall be such as may be prescribed.

Provided further that the chairperson and members shall make a declaration to the Central Government in the prescribed form regarding no conflict of interest or lack of independence in respect of his or their appointment.

Provided also that the chairperson and members, who are in full-time employment with NFRA shall not be associated with any audit firm (including related consultancy firms) during the course of their appointment and two years after ceasing to hold such appointment.

(4) Not withstanding anything contained in any other law for the time being in force, the NFRA shall—

(a) have the power to investigate, either suo moto or on a reference made to it by the Central Government, for such class of bodies corporate or persons, in such manner as may be prescribed into the matters of professional or other misconduct committed by any member or firm of chartered accountants, registered under the Chartered Accountants Act, 1949.
Provided that no other institute or body shall initiate or continue any proceedings in such matters of misconduct where the NFRA has initiated an investigation under this section;

(b) have the same powers as are vested in a civil court under the Code of Civil Procedure, 1908, while trying a suit, in respect of the following matters, namely:—
  1. discovery and production of books of account and other documents, at such place and at such time as may be specified by the NFRA;
  2. summoning and enforcing the attendance of persons and examining them on oath;
  3. inspection of any books, registers and other documents of any person referred to in clause (b) at any place;
  4. issuing commissions for examination of witnesses or documents;
(c) where professional or other misconduct is proved, the NFRA shall have the power to make order for—
(A) imposing penalty of—
  1. not less than one lakh rupees, but which may extend to five times of the fees received, in case of individuals; and
  2. not less than five lakh rupees, but which may extend to ten times of the fees received, in case of firms;
(B) debarring the member or the firm from-
  1. being appointed as an auditor or internal auditor or undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate; or
  2. performing any valuation as provided under section 247,
for a minimum period of six months or such higher period not exceeding tenyears as may be determined by the National Financial Reporting Authority.

Explanation — For the purposes of this sub-section, the expression "professional or other misconduct" shall have the same meaning assigned to it as given under section 22 of the Chartered Accountants Act, 1949.

Appeal against orders of NFRA

Any person aggrieved by any order of the National Financial Reporting Authority issued  under  clause  (c)  of  sub-section  (4),  may  prefer  an  appeal  before  the Appellate Tribunal in such manner and on payment of such fee as may be prescribed.

Meetings of NFRA

The National Financial Reporting Authority shall meet at such times and places and shall observe such rules of procedure in regard to the transaction of business at its meetings in such manner as may be prescribed.

Secretary and other employees

The Central Government may appoint a secretary and such other employees as it may consider necessary for the efficient performance of functions by the National Financial Reporting Authority under this Act and the terms and conditions of service of the secretary and employees shall be such as may be prescribed.
 
Head office of NFRA

The head office of the National Financial Reporting Authority shall be at New Delhi and the National Financial Reporting Authority may, meet at such other places in India as it deems fit.

Maintenance of books by NFRA

The National Financial Reporting Authority shall cause to be maintained such books of account and other books in relation to its accounts in such form and in such manner as the Central Government may, in consultation with the Comptroller and Auditor-General of India prescribe.

Audit of account of NFRA

The accounts of the National Financial Reporting Authority shall be audited by the Comptroller and Auditor-General of India at such intervals as may be specified by him and such accounts as certified by the Comptroller and Auditor-General of India together with the audit report thereon shall be forwarded annually to the Central Government by the National Financial Reporting Authority.

Annual Report on working of NFRA

The National Financial Reporting Authority shall prepare in such form and at such time for each financial year as may be prescribed its annual report giving a full account of its activities during the financial year and forward a copy thereof to the Central Government and the Central Government shall cause the annual report and the audit report given by the Comptroller and Auditor-General of India to be laid before each House of Parliament.

In exercise of the powers conferred under sub-sections (2) and (4) of section 132, the Central Government made the National Financial Reporting Authority Rules, 2018 (NFRA Rules).

As per NFRA rules, NFRA shall have power to monitor and enforce compliance with accounting standards and auditing standards, oversee the quality of service under sub-section (2) of section 132 or undertake investigation under sub-section (4) of such section of the auditors. Rule 3 provides for the classes of companies and bodies corporate governed by the NFRA. These include:
  1. companies whose securities are listed on any stock exchange in India or outside India;
  2. unlisted public companies having paid-up capital of not less than rupees five hundred crores or having annual turnover of not less than rupees one thousand crores or having, in aggregate, outstanding loans, debentures and deposits of not less than rupees five hundred crores as on the 31st March of immediately preceding financial year;
  3. insurance companies, banking companies, companies engaged in the generation or supply of electricity, companies governed by any special Act for the time being in force or bodies corporate incorporated by an Act in accordance with clauses (b), (c), (d), (e) and (f) of section 1 (4) of the Companies Act, 2013;
    Explanation.-  For  the  purpose  of  this  clause,  “banking  company”  includes ‘corresponding new bank’ as defined in section 2 (d) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and section 2(b) of the Banking Companies (Acquisition and Transfer of  Undertakings) Act, 1980 and ‘subsidiary bank’ as defined in section 2(k) of the State Bank of India (Subsidiary Bank) Act, 1959.
  4. any body corporate or company or person, or any class of bodies corporate or companies or persons, on a reference made to the NFRA by the Central Government in public interest; and
  5. a body corporate incorporated or registered outside India, which is a subsidiary or associate company of any company or body corporate incorporated or registered in India as referred to in clauses (a) to (d) above,   if the income or networth of such subsidiary or associate company exceeds 20% of the consolidated income or  consolidated networth of such company or the body corporate, as the case may be, referred to in clauses (a) to (d) above.
Every existing body corporate other than a company governed by these rules, shall inform the NFRA within 30 days of the commencement of NFRA rules, in Form NFRA-1, the particulars of the auditor as on the date of commencement of these rules.

A company or a body corporate other than a company governed under NFRA Rules shall continue to be governed by the NFRA for a period of 3 years after it ceases to be listed or its paid-up capital or turnover or aggregate of loans, debentures and deposits falls below the limit stated therein[i.e. mentioned in points (a) to (e) above].

Punishment in case of non-compliance - If a company or any officer of a company or an auditor or any other person contravenes any of the provisions of NFRA Rules, the company and every officer of the company who is in default or the auditor or such other person shall be punishable as per the provisions of section 450 of the Act.


7. CENTRAL GOVERNMENT TO PRESCRIBE ACCOUNTING STANDARDS [SECTION 133]

Section 133 of the Companies Act, 2013 deals with the power of the Central Government to prescribe the accounting standards.

The Central Government may prescribe the standards of accounting or any addendum thereto, as recommended by the ICAI in consultation with and after examination of the recommendations made by the NFRA.

Provided that until the NFRA is constituted under section 132 of the Companies Act, 2013, the Central Government may prescribe the standards of accounting or any addendum thereto, as recommended by the ICAI in consultation with and after examination of  the recommendations made by the National Advisory Committee  on Accounting Standards (NACAS) constituted under the previous company law.



8. FINANCIAL STATEMENT, BOARD’S REPORT, ETC. [SECTION 134]

Section 134 provides that the financial statement including consolidated financial statements should be approved by the Board of Directors before they are signed and submitted to auditors for their report. The auditor’s report is to be attached to every financial statement. A report by the Board of Directors containing details on the matters specified including Director’s responsibility statement shall be attached to every financial statement laid before the company. The Board’s report and every annexure has to be duly signed. A signed copy of every financial statement shall be circulated, issued or published along with all notes or documents, the auditor’s report and Board’s report. The clause also provides for penal provisions for the company and every officer of the company in case of any contravention.

(i) Authentication of Financial statements [Section 134(1), (2) & (7)]:


  1. The financial statement, including consolidated financial statement, if any, shall be approved by the Board of Directors before they are signed on behalf of the Board at least by the chairperson of the company where he is authorised by the Board OR  by two directors out of which one shall be managing director, if any, and the Chief Executive Officer, the Chief Financial Officer and the company secretary of the company, wherever they are appointed, or in the case of One person company, only by one director, for submission to the auditor for his report thereon.
  2. The auditors’ report shall be attached to every financial statement [Sub- section (2)].
  3. A signed copy of every financial statement, including consolidated financial statement, if any, shall be issued, circulated or published along with a copy of [Section 134(7)] —

    (1) Any notes annexed to or forming part of such financial statement;
    (2) The auditor’s report; and
    (3) The Board’s report referred to in sub section 3.
Example 3: The Board of Directors of ABC Ltd. wants to circulate unaudited accounts before the Annual General Meeting of the shareholders of the Company. Whether such an act of ABC Ltd. is tenable?

Answer: Section 129(2) of the Companies Act, 2013 provides that at every annual general meeting of a company, the Board of Directors of the company shall lay before such meeting financial statements for the financial year. Further section 134(7) provides that signed copy of every financial statement, including consolidated financial statement, if any, shall be issued, circulated or published along with a copy each of:
  1. any notes annexed to or forming part of such financial statement;
  2. the auditor’s report; and
  3. the Board’s report.
It, therefore, follows that unaudited accounts cannot be sent to members or unaudited accounts cannot be filed with the Registrar of Companies. So, such an act of ABC Ltd, is not tenable.

(ii) Board’s report [Section 134(3) & (4) read with Rule 8 of the Companies (Accounts) Rules, 2014]:

(1) According to Rule 8 of the Companies (Accounts) Rules, 2014, the Board’s Report shall be prepared based on the standalone financial statement of the company and shall report on the highlights of performance of subsidiaries, associates and joint venture companies and their contribution to the overall performance of the company during the period under report.

(2) Sub-section  (3)  of  section  134  read  with  rule  8  prescribes  the  following contents of the board’s report:
  1. the web address, if any, where annual return referred to in sub-section (3) of section 92 (Annual Return) has been placed;
  2. number of meetings of the Board;
  3. directors’ responsibility statement;
    (ca)   details in respect of frauds reported by auditors under sub-section (12) of section 143 (Powers and duties of  auditors  and  auditing  standards) other than those which are reportable to the Central Government;
  4. a statement on declaration given by independent directors under sub- section (6) of section 149 (Company to have board of board of Directors in relation to independent director);
  5. in  case  of  a  company  covered  under  sub-section  (1)  of section  178 (Nomination and Remuneration Committee and Stakeholders Relationship Committee), company’s policy on directors’ appointment and remuneration including criteria for determining qualifications, positive attributes, independence of a director and other matters provided under sub-section (3) of section 178;
    Note: The above clause (e) shall not apply in the case of a government company.
  6. explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made—
    (i) by the auditor in his report; and
    (ii) by the company secretary in practice in his secretarial audit report;
  7. particulars of loans, guarantees or investments under section 186;
  8. particulars of contracts or arrangements with related parties referred to in sub-section (1) of section 188 in the form AOC-2;
  9. the state of the company’s affairs;
  10. the amounts, if any, which it proposes to carry to any reserves;
  11. the amount, if any, which it recommends should be paid by way of dividend;
  12. 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;
  13. the conservation of energy, technology absorption, foreign exchange earnings and outgo, in such manner as may be prescribed; However, the Govt. companies engaged in producing defence equipment is exempted from disclosure under this clause.
  14. 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;
  15. the details about the policy developed and implemented by the company on corporate social responsibility initiatives taken during the year;
  16. in case of a listed company and every other public company having such paid-up share capital as may be prescribed, a statement indicating the manner in which formal annual evaluation of the performance of the Board, its Committees and of individual directors has been made;

    According to Rule 8(4), every listed company and every other public company having a paid up share capital of twenty five crore rupees or more calculated at the end of the preceding financial year shall include, in the report by its Board of directors, 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.

    Exemption to Government company- The above clause (p) of Sub- section (3) of Section 134 shall not apply, in case the directors are evaluated by the Ministry or Department of the Central Government which is administratively in charge of the company, or, as the case may be, the State Government, as per its own evaluation methodology [vide Notification dated 5 June 2015].

    Provided  that  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.
    Provided further that 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.

    According to Rule 8 of the Companies (Accounts) Rules, 2014, the report of the Board shall also contain–
    (i) the financial summary or highlights;
    (ii) the change in the nature of business, if any;
    (iii) the details of directors or key managerial personnel who were appointed or have resigned during the year;
    (iiia) a statement regarding opinion of the Board with regard to integrity, expertise and experience (including the proficiency) of the independent directors appointed during the year.

    Explanation.-
    For  the  purposes  of  this  clause,  the  expression “proficiency” means the proficiency of the independent director as  ascertained  from  the  online  proficiency  self-assessment  test conducted  by  the  institute  notified  under  sub-section  (1)  of section 150 (Manner of selection of Independent Directors and maintenance of databank of independent directors).
    (iv) the names of companies which have become or ceased to be its subsidiaries, joint ventures or associate companies during the year;
    (v) the details relating to deposits like-

    (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-

    (1) at the beginning of the year;
    (2) maximum during the year;
    (3) at the end of the year;

    (vi) the details of deposits which are not in compliance with the requirements of Chapter V (Acceptance of Deposits by Companies) of the Act;
    (vii) the details of significant and material orders passed by the regulators or courts or tribunals impacting the going concern status and company’s operations in future;
    (viii) the details in respect of adequacy of internal financial controls with reference to the Financial Statements.
    (ix) a disclosure, as to whether maintenance of cost records as specified  by  the  Central  Government  under  sub-section  (1)  of section 148 of the Companies Act, 2013, is required by the Company and accordingly such accounts and records are made and maintained,
    (x) a statement that the company has complied with provisions relating to the constitution of Internal Complaints Committee under the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013.
Non - applicability of Rule 8 of Companies (Accounts) Rules, 2014: This rule shall not apply to One Person Company or Small Company.

(3) Abridged Board's report [Section 134(3A)]: The Central Government may prescribe an abridged Board's report, for the purpose of compliance with this section by One Person Company or small company.

(4) Board’s Report in case of OPC [Section 134(4)]: In case of a One Person Company, the report of the Board of Directors to be attached to the financial statement under this section shall, mean a report containing explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made by the auditor in his report.

(iii) Directors’ Responsibility Statement [Section 134(5)]: The Directors’ Responsibility Statement referred to in 134(3)(c) shall state that—
  1. in the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures;
  2. the directors had selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as 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;
  3. the directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities;
  4. the directors had prepared the annual accounts on a going concern basis; and
  5. the directors, in the case of a listed company, had laid down internal financial controls to be followed by the company and that such internal financial controls are adequate and were operating effectively.
    Here, the term “internal financial controls” means the policies and procedures adopted by the company for ensuring the orderly and efficient conduct of its business, including adherence to company’s policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information;
  6. 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.
(iv) Signing of Board’s Report [Section 134(6)]:

The Board’s report and any annexures thereto under sub-section (3) shall be signed by its chairperson of the company if he is authorised by the Board and where he is not so authorised, shall be signed by at least two directors, one of whom shall be a managing director, or by the director where there is one director.

(v) Contravention [Section 134(8)]:

Person liablePunishment for contravention of any provision of this section
CompanyFine which shall not be less than 50,000 but which may extend to 25 lakhs
Every officer of the company who is in default
  1. Imprisonment for a term which may extend to 3 years
  2. fine which shall not be less than 50,000 but which may extend to 5 lakhs
  3. Both with imprisonment and fine

Example 4: ABC Company is a one person company and has only one director. Who shall authenticate the balance sheet and statement of profit & loss and the Board‘s report?
 
Answer: In case of a One Person Company, the financial statements shall be signed by only one director, for submission to the auditor for his report thereon. So, the financial statements signed by one director shall be considered in order.



9. CORPORATE SOCIAL RESPONSIBILITY [SECTION 135]

The Companies Act, 2013 lays down the provisions requiring corporates to mandatorily spend a prescribed percentage of their profits on certain specified areas of social upliftment in discharge of their social responsibilities. Broadly, Corporate Social Responsibility (CSR) implies a concept, whereby companies decide to contribute to a better society and a cleaner environment – a concept, whereby the companies integrate social and other useful concerns in their business operations for the betterment of its stakeholders and society in general.

Corporate Social Responsibility: The Companies (CSR Policy) Rules, 2014 [Rule 2(1)(c)] provides the exhaustive definition of CSR which provides that the CSR means and includes but is not limited to:
  1. Projects or programs relating to activities areas or subjects specified in Schedule VII to the Act; or
  2. Projects or programs relating to activities undertaken by the board of directors of a company in pursuance of recommendations of the CSR Committee of the Board as per declared CSR Policy of the company subject  to the condition that such policy include activities, areas or subjects specified in Schedule VII of the Act.
    Explanation: Schedule VII of the Act provides for the list of activities which may be included by Companies in their Corporate Social Responsibility Policies.
According to section 135 of the Companies Act, 2013 read with the Companies (Corporate Social Responsibility) Rules, 2014:
 
(i) Which company is required to constitute CSR committee:

(a) According to section 135(1), every company having
  1. net worth of rupees 500 crore or more, or
  2. turnover of rupees 1000 crore or more or
  3. a net profit of rupees 5 crore or more
during the immediately preceding financial year shall constitute a Corporate Social Responsibility Committee.

As per Rule 3(1) of the Companies (Corporate Social Responsibility) Rules, 2014-

Every company including its holding or subsidiary, and a foreign company defined under clause (42) of section 2 of the Act having its branch office or project office in India, which fulfills the criteria specified in sub-section (I) of section 135 of the Act shall comply with the provisions of section 135 of the Act and these rules.

Provided that net worth, turnover or net profit of a foreign company of the Act shall be computed in accordance with balance sheet and Profit and loss account of such company prepared in accordance with the provisions  of  clause  (a)  of  sub-section  (1)  of section  381 and section 198 of the Act.

“Net worth” [As per Section 2(57)] means the aggregate value of the paid-up share capital and all reserves created out of the profits and securities premium account and debit or credit balance of the profit and loss account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation.

Explanation.—For the purposes of this section (i.e. section 135) "net profit" shall not include such sums as may be prescribed, and shall be calculated in accordance with the provisions of section 198 (Calculation of profits).

Example 5: The statutory auditors of a company were required to issue a certificate on the net worth of the company as per the requirement of the management as on 30th September 2018 computed as per the provision of section 2(57) of the Companies Act, 2013.

The company had fair valued its property, plant and equipment in the current year which was mistakenly taken into retained earnings of the company in its books of accounts. Please advise whether this fair valuation would be covered in the net worth of the company as per the legal requirements.

Answer: As per sec 2(57) of the Companies Act 2013, any reserves created out of revaluation of assets doesn’t form part of net worth. The company fair valued its property, plant and equipment and took that to retained earnings.

Even if the company has taken the fair valuation to the retained earnings in its books of accounts, the resultant credit in reserves (by whatever name called) would be in the category of ‘reserves created out of revaluation of assets’ which is specifically excluded in the definition of ‘net worth’ in section 2 (57) and hence should be excluded by the company.

Further the auditors should also consider the matter related to accounting of this reserve separately at the time of audit of books of accounts of the company.

Example 6: ABC Ltd is a company with a turnover of more than Rs.1000 crores and having incurred a loss in one of the preceding three financial years. Will  it be required to comply with CSR?

Answer: As per section 135(1) of the Act, if any one of the three criteria (whether net worth, or turnover or net profit) gets satisfied then the company is mandatorily required to comply with the CSR provisions. Hence ABC Ltd. will be required to comply with CSR based on its turnover. The mere fact that company has incurred loss in one of the preceding three financial years will not be considered for determining the applicability of CSR to the companies.

(ii) Exclusion of Companies [Rule 3(2) of the Companies (CSR) Rules, 2014]

Every company which ceases to be a company covered under subsection (1) of section 135 of the Act for three consecutive financial years shall not be required to-
  1. constitute a CSR Committee; and
  2. comply with the provisions contained in sub-section (2) to (5) of the said section,
till such time it meets the criteria specified in sub-section (1) of section 135.
 
(iii) Composition of CSR Committee:
 
  1. The CSR Committee of the Board shall be consisting of three or more directors, out of which at least one director shall be an independent director.
    Provided that where a company is not required to appoint an independent director under sub-section (4) of section 149, it shall have in its Corporate Social Responsibility Committee two or more directors.
  2. According to Rule 5(1) of the Companies (CSR) Rules, 2014,
    The companies mentioned in the rule 3 shall constitute CSR Committee as under.-

    (i) an unlisted public company or a private company covered under subsection (1) of section 135 which is not required to appoint an independent director pursuant to sub-section (4) of section 149 of the Act, shall have its CSR Committee without such director ;
    (ii) a private company having only two directors on its Board shall constitute its CSR Committee with two such directors;
    (iii) with respect to a foreign company covered under these rules, the CSR Committee shall comprise of at least two persons of which one person shall be as specified under clause (d) of sub-section
    (1) of section 380 of the Act and another person shall be nominated by the foreign company
  3. According to Rule 5(2) of the Companies (CSR) Rules, 2014, the CSR Committee shall institute a transparent monitoring mechanism for implementation of  the CSR projects or programs or activities undertaken by the company.
  4. The Board’s report under sub-section (3) of section 134 shall disclose the composition of the CSR Committee[Section 135(2)]
(iv) Duties of CSR Committee [Section 135(3)]:

The CSR Committee shall-
  1. formulate and recommend to the Board, a CSR Policy which shall indicate the activities to be undertaken by the company in areas or subject, specified in Schedule VII;
  2. recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and
  3. monitor the CSR Policy of the company from time to time.
(v) Contents of the CSR Policy: [Rule 6 of the Companies (CSR) Rules, 2014]:
  1. List of CSR projects or programs which a company plans to undertake areas or subjects specified in of the Schedule VII of the Act, specifying modalities of execution of such project or programs and implementation schedules for the same; and
  2. monitoring process of such projects or programs:
  3. Provided that the Board of Directors shall ensure that activities included by a company in its CSR Policy are related to the areas or subjects specified in Schedule VII of the Act.
  4. The CSR Policy of the company shall specify that the surplus arising out of the CSR projects or programs or activities shall not form part of the business profit of a company.
(vi) Duties of the Board in relation to CSR [Section 135(4)]:

The Board of every company referred to in sub-section (1) shall—
  1. after taking into account the recommendations made by the CSR Committee, approve the CSR Policy for the company and disclose contents of such Policy in its report and also place it on the company’s website, if any, in such manner as may be prescribed; and
  2. ensure that the activities as are included in CSR Policy of the company are undertaken by the company.
(vii) Amount of contribution towards CSR [Section 135(5)]:
  1. The Board of every company shall ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made

    during the three immediately preceding financial years
    in pursuance of its CSR Policy.

  2. Provided that the company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for CSR activities.
  3. Provided further that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount
(viii) CSR Activities:

Rule 4 of the Companies (CSR Policy) Rules, 2014 states the various CSR activities that shall be undertaken by the companies.
  1. The CSR activities shall be taken by the company as per its CSR Policy, as projects or programmes or activities either new or ongoing,
  2. The Board of a company may decide to undertake its CSR activities approved by the CSR Committee, through
    (a) a company established under section 8 of the Act or a registered trust or a registered society, established by the company, either singly or alongwith any other company, or
    (b) a company established under section 8 or a registered trust or a registered society, established by the Central Government or State Government or any entity established under an Act of Parliament or a State Legislature:
    Provided that- if, the Board of a company decides to undertake its CSR activities through a company established under section 8 of the Act or a registered trust or a registered society, other than those specified in this sub-rule, such company or trust or society shall have an established track record of three years in undertaking similar programs or projects; and the company has specified the projects or programs to be undertaken, the modalities of utilisation of funds of such projects and programs and the monitoring and reporting mechanism.
  3. A company may also collaborate with other companies for undertaking projects or programs or CSR activities in such manner that the CSR Committees of respective companies are in a position to report separately on such projects or programs in accordance with these rules.
(ix) Exceptions to CSR Activities:

The Companies (CSR Policy) Rules, 2014 provides for some activities which are not considered as CSR activities:
  1. The CSR projects or programs or activities undertaken outside India [Rule 4(4)].
  2. The CSR projects or programs or activities that benefit only the employees of the company and their families [Rule 4(5)].
  3. Companies may build CSR capacities of their own personnel as well as those of implementing agencies through Institutions with established track records of at least three financial years but such expenditure including expenditure on administrative overhead shall not exceed 5% of total CSR expenditure of the company in one financial year. [Rule 4(6)]
  4. Contribution of any amount directly or indirectly to any political party under section 182 of the Act [Rule 4(7)].
Example 7: ADV Ltd. is engaged in the business of construction and has various projects which are under execution in Delhi-NCR region. The company is also looking for new projects, particularly in Southern part of India based on an understanding that the margins are very high over there.

During the year ended 31st March 2018, the company got covered within the requirements of CSR. Considering the nature of its business, company has a large employee base and it decided to spend CSR on some activity related to construction which would benefit its employees and would indirectly also  help the business of the company. Please advise on this.

Answer: As per the requirements of CSR, the projects or programs or activities that benefit only the employees of the company and their families shall not be considered as CSR activities in accordance with section 135 of the Act. Accordingly, in the given case, the activity planned by the company is related to its business only and that too only for the benefit of its employees would not be considered as part of CSR requirements.
 
 
(x) Calculation of Average Net profit:

  1. For the purpose of this section “net profit” shall not include such sums as may be prescribed, and shall be calculated in accordance with the provisions of section 198.
  2. “Net profit” shall not include the following:
    (1) Any profit arising from any overseas branch or branches of the company, whether operated as a separate company or otherwise; and
    (2) Any dividend received from other companies in India, which are covered under and complying with the provisions of section 135 of the Act.
    However, net profits in respect of a financial year for which the relevant financial statements were prepared in accordance with the provisions of the Companies Act, 1956, shall not be required to be re-calculated in accordance with the provisions of the Act.
    It is further provided that in case of a foreign company covered under these rules, net profit means the net profit of such company as per profit and loss account prepared in terms of clause (a) of sub-section
    (1) of section 381 read with section 198 of the Act [Rule 2(f)].
(xi) CSR Reporting (Rule 8):

  1. The Board’s Report of a company covered under these rules pertaining to a financial year commencing on or after the 1st April, 2014 shall include an annual report on CSR.
  2. In case of a foreign company, the balance sheet filed under section 381(1)(b) shall contain an Annexure regarding report on CSR.
(xii) Activities specified under Schedule VII:

Activities which may be included by companies in their CSR Policies (i.e. Activities as specified under Schedule VII) are as follows:
  1. eradicating hunger, poverty and malnutrition, promoting health care including preventive health care and sanitation including contribution to the Swach Bharat Kosh set-up by the Central Government for the promotion of sanitation and making available safe drinking water;
  2. promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly, and the differently abled and livelihood enhancement projects;
  3.  promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups;
  4. ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and water including contribution to the Clean Ganga Fund set up by the Central Government for rejuvenation of river Ganga;
  5. protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts;
  6. measures for the benefit of armed forces veterans, war widows and their dependents, Central Armed Police Forces (CAPF) and Central Para Military Forces (CPMF) veterans, and their dependents including widows;
  7. training to  promote rural sports, nationally recognised sports, paralympic sports and Olympic sports;
  8. contribution to the Prime Minister’s National Relief Fund or Prime Minister’s Citizen Assistance and Relief in Emergency situations Fund (PM CARES FUND) any other fund set up by the Central Government for socio-economic development and relief and  welfare of the Scheduled Castes, Tribes, other backward classes, minorities and women;
  9. (a) Contribution to incubators or research development projects in the field of science, technology, engineering and medicine, funded by Central Government or State Government or any agency or Public Sector Undertaking of Central Government or State Government, and
    (b) contributions to public funded Universities; Indian Institute of Technology (IITs); National Laboratories and Autonomous Bodies established under Department of Atomic Energy (DAE); Department of Biotechnology (DBT); Department of Science and Technology (DST); Department of Pharmaceuticals; Ministry of Ayurveda, Yoga and Naturopathy, Unani, Siddha and Homoeopathy
    (AYUSH); Ministry of Electronics and Information Technology and other bodies, namely Defense Research and Development Organisation (DRDO);Indian Council of Agricultural Research (ICAR); Indian Council of Medical Research (ICMR) Council of Scientific and Industrial Research (CSIR), engaged in conducting research in science, technology, engineering and medicine aimed at promoting Sustainable Development Goals (SDGs);
  10. rural development projects;
  11. slum area development. [For the purposes of this item, the term ‘slum area’ shall mean any area declared as such by the Central Government or any State Government or any other competent authority under any law for the time being in force.
  12. disaster management, including relief, rehabilitation and reconstruction activities.
The MCA vide General Circular No. 21/2014 dated 18 June 2014 has provided many clarifications with regard to provisions of Corporate Social Responsibility under section 135 of the Companies Act, 2013 which are as under:
  1. The statutory provision and provisions of CSR Rules, 2014, is to ensure that while activities undertaken in pursuance of the CSR policy must be relatable to Schedule VII of the Companies Act 2013, the entries in the said Schedule VII must be interpreted liberally so as to capture the essence of the subjects enumerated in the said Schedule. The items enlisted in the amended Schedule VII of the Act, are broad-based and are intended to cover a wide range of activities as illustratively mentioned in the Annexure.
  2. It is further clarified that CSR activities should be undertaken by the companies in project/ programme mode. One-off events such as marathons/ awards/ charitable contribution/ advertisement/ sponsorships of TV programmes etc. would not be qualified as part of CSR expenditure.
  3. Expenses incurred by companies for the fulfillment of any Act/ Statute of regulations (such as Labour Laws, Land Acquisition Act etc.) would not count as CSR expenditure under the Companies Act.
    The said clarification stands omitted as per General Circular No. 36/2014 dated 17th September 2014
  4. “Any financial year” referred under sub-section (1) of section 135 of the Act read with the Companies CSR Rule, 2014, implies ‘any of the three preceding financial years.
  5. Expenditure incurred by Foreign Holding Company for CSR activities in India will qualify as CSR spend of the Indian subsidiary if, the CSR expenditures are routed through Indian subsidiaries and if the Indian subsidiary is required to do so as per section 135 of the Act.
  6. ‘Registered Trust’ would include Trusts registered under Income Tax Act 1956, for those States where registration of Trust is not mandatory.
  7.  Contribution to Corpus of a Trust/ society/ section 8 companies etc. will qualify as CSR expenditure as long as (a) the Trust/ society/ section 8 companies etc. is created exclusively for undertaking CSR activities or (b) where the corpus is created exclusively for a purpose directly relatable to a subject covered in Schedule VII of the Act.
Penal Provisions

The Companies Act requires that—
  1. The Board’s report shall disclose the composition of the Corporate Social Responsibility Committee as per subsection (3) of section 134;
  2. If the company fails to spend such amount (i.e. at least two percent of the average net profit), the Board shall disclose and specify the reasons for not spending the amount in its report as per Clause (o) of sub-section (3) of section 134.
As per section 134 of Companies Act, 2013 if the Company fails to disclose such information, it shall be punishable with fine, which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees or with both.



10. RIGHT OF MEMBERS TO COPIES OF AUDITED FINANCIAL STATEMENT [SECTION 136]

Section 136 provides that a copy of financial statements including consolidated financial statement, if any, auditor’s report and every other document required by law to be annexed or attached to the financial statements, which are to be laid before a company in its general meeting, shall be sent to every member of the company, to every trustee for the debenture-holder of any debentures issued by the company, and to all persons other than such member or trustee, being the person so entitled, not less than twenty-one days before the date of the meeting.

(i) What if the documents are sent less than 21 days before the date of meeting?

According to Section 136, If the copies of the documents are sent less than twenty-one days before the date of the meeting, they shall, notwithstanding that fact, be deemed to have been duly sent if it is so agreed by members—
  1. holding, if the company has a share capital, majority in number entitled to vote and who represent not less than ninety-five per cent. Of such part of the paid-up share capital of the company as gives a right to vote at the meeting; or
  2. having, if the company has no share capital, not less than ninety five percent of the total voting power exercisable at the meeting:
Provided further that in the case of a listed company, the provisions of this sub-section  shall  be  deemed  to  be  complied  with,  if  the  copies  of  the documents are made available for inspection at its registered office during working hours for a period of twenty-one days before the date of the meeting and a statement containing the  salient  features  of  such  documents  in  the prescribed form or copies of the documents, as the company may deem fit, is sent to every member of the company and to every trustee for the holders of any debentures issued by the company not less than twenty-one days before the date of the meeting unless the shareholders ask for full financial statements.

Provided further that the Central Government may prescribe the manner of circulation of financial statements of companies having such net worth and turnover as may be prescribed.
Provided further that a listed company shall also place its financial statements including consolidated financial statements, if any, and all other documents required to be attached thereto, on its website, which is maintained by or on behalf of the company.

Provided also that every listed company having a subsidiary or subsidiaries shall -
  1. place separate audited accounts in respect of each of subsidiary on its website, if any;
  2. provide a copy of separate audited or unaudited financial statements, as the case may be, as prepared in respect of each of its subsidiary, to any member of the company who asks for it.
Provided also that a listed company which has a subsidiary incorporated outside India (herein referred to as "foreign subsidiary")—
  1. where such foreign subsidiary is statutorily required to prepare consolidated financial statement under any law of the country of its incorporation, the requirement of this proviso shall be met if consolidated financial statement of such foreign subsidiary is placed on the website of the listed company;
  2. where such foreign subsidiary 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 holding Indian listed company may place such unaudited financial statement on its website and where such financial statement is in a language other than English, a translated copy of the financial statement in English shall also be placed on the website.

    Example 8: Reliance Industries Limited, a company incorporated under the Companies Act, 2013, has its shares listed on a recognized Stock Exchange in India. One of the subsidiary of Reliance Industries Limited is a foreign company incorporated outside India. In the annual general meeting of the company, Reliance Industries Limited has placed its audited financial statement including consolidated financial statement on its website. Reliance Industries Limited has also placed on its website separate audited accounts of all its subsidiary located in India except one subsidiary, which is a foreign company and located outside India  on the grounds that such foreign company is not required to get its financial statement audited under the company law of its incorporation. You are required to examine whether Reliance Industries Limited has complied with the provisions of section 136?

    Answer: No, Reliance Industries Limited has not complied with the provisions of section 136 because Reliance Industries Limited is also required to place unaudited financial statement of its foreign subsidiary on its website even if such foreign subsidiary is not required to get its financial statement audited as per the provisions of section 136.



In case of Nidhi company - Section 136 (1) shall apply, subject to the modification that, in the case of members who do not individually or jointly hold shares of more than one thousand rupees in face value or more than one per cent, of the total paid-up share capital, whichever is less, it shall be sufficient compliance with the provisions of the section if an intimation is sent by public notice in newspaper circulated in the district in which the Registered Office of the company is situated stating the date, time and venue of AGM and the financial statement with its enclosures can be inspected at the registered office of the company and the financial statement with enclosures are affixed in the notice board of the company and a member is entitled to vote either in person or through proxy

A company shall also allow every member or trustee of the debenture holder to inspect the audited financial statement at its registered office during business hours.

(ii) Manner of circulation of financial statements in certain cases:

In case of all listed companies and such public companies which have a net worth of more than one crore rupees and turnover of more than ten crore rupees, the financial statements may be sent [Rule 11 of the Companies (Accounts) Rules, 2014]-
  1. by electronic mode to such members whose shareholding is in dematerialized format and whose email Ids are registered with Depository for communication purposes;
  2. where shareholding is held otherwise than by dematerialized format, to such members who have positively consented in writing for receiving by electronic mode (this may not be relevant considering that shareholding is not held otherwise than by dematerialized form anymore); and
  3. by dispatch of physical copies through any recognised mode of delivery as specified under section 20 of the Act, in all other cases.
(iii) Contravention:
  1. If any default is made in complying with the provisions of section 136, the company shall be liable to a penalty of 25,000 rupees and
  2. Every officer of the company who is in default shall be liable to a penalty of 5,000 Rupees.
Vide General Circular No. 11/2015, dated 21 July 2015, clarification was issued by MCA with regard to circulation and filing of financial statement.

It has been clarified that a company holding general meeting after giving shorter notice as provided under section 101 of the Act may also circulate financial statements (to be laid/ considered in the same general meeting) at such shorter notice.

It has also been clarified that in case of foreign company which is not required to get its accounts audited as per the legal requirements prevalent in the country of its incorporation and which does not get such accounts audited, the holding or parent Indian company may place or file such unaudited accounts to comply with requirements of section 136(1) and 137(1), as applicable. These, however, would need to be translated in English, if the original accounts are not in English. Further, the format of accounts of foreign subsidiaries should be, as far as possible, in accordance with requirements under the Companies Act, 2013. In case this is not possible, a statement indicating the reasons for deviation may be placed/ filed along with such accounts.
 


11. COPY OF FINANCIAL STATEMENT TO BE FILED WITH REGISTRAR [SECTION 137]

This section provides that copies of financial statement including consolidated financial statement, if any, along with all the documents annexed to financial statement and adopted at AGM shall be filed with Registrar.


  1. Filing of financial statements [Section 137(1)]:

    (1) Section 137 read with Rule 12 of the Companies (Account Rules), 2014 states that - A copy of the financial statements with form AOC-4, including consolidated  financial  statement  with  form  AOC-4  CFS,  along  with  all  the documents which are required to be or attached to such financial statements under this Act, duly adopted at the AGM of the company, shall be filed with the Registrar within 30 days of the date of AGM in such manner, with such fees or additional fees as may be prescribed.

    (1A) Every Non-Banking Financial Company (NBFC) that is required to comply with Indian Accounting Standards (Ind AS) shall file the financial statements with Registrar together with FORM AOC-4 NBFC (Ind AS) and the consolidated financial statement, if any with FORM AOC-4 CFS NBFC (Ind AS)
    As per Rule 1 of the Companies (Filing of Documents and forms in Extensible Business Reporting Language) Rules, 2015-
    The following class of companies shall file their financial statements and other documents under section 137 of the Act with the Registrar in e-form AOC- 4 XBRL as per Annexure-I:

    (i) companies listed with stock exchanges in India and their Indian subsidiaries;
    (ii) companies having paid up capital of five crore rupees or above;
    (iii) companies having turnover of one hundred crore rupees or above;
    (iv) all companies which are required to prepare their financial statements in accordance with Companies (Indian Accounting Standards) Rules, 2015.
    Provided that the companies preparing their financial statements under the Companies (Accounting Standards) Rules, 2006 shall file the statements using the Taxonomy provided in Annexure-II and companies preparing their financial statements under Companies (Indian Accounting Standards) Rules, 2015, shall file the statements using the Taxonomy provided in Annexure-II A.
    Provided further that non-banking financial companies, housing finance companies and companies engaged in the business of banking and insurance sector are exempted from filing of financial statements under these rules.

    (2) The companies which have filed their financial statements under sub-rule (1) and erstwhile rules shall continue to file their financial statements and other documents though they may not fall under the class of companies specified therein in succeeding years.

    Example 9: Amazon Company Limited, a company incorporated under the Companies Act, 2013, has a turnover of Rs. 150 crores and Rs. 90 crores during the financial year ended 31st March 2019 and 31st March 2020 respectively.

    Now Amazon Company Limited shall continue to file the financial statements and other documents under section 137 in e-form AOC-4 XBRL for the financial year ended 31st March 2020 even if the company does not fall in the class of companies provided under Rule 3 of the Companies (Filing of documents and forms in Extensible Business Reporting Language) Rules, 2015.

  2. If the financial statements are not adopted [Section 137(1)]:

    (a) Where the financial statements are not adopted at AGM or adjourned AGM, such unadopted financial statements along with the required documents shall be filed with the Registrar within 30 days of the date of AGM.
    (b) The Registrar shall take them in his records as provisional till the financial statements are filed with him after their adoption in the adjourned AGM for that purpose.
    (c) If the financial statements are adopted in the adjourned AGM, then they shall be filed with the Registrar within 30 days of the date of such adjourned AGM with such fees or such additional fees as may be prescribed.
  3. Filing by One Person Company [Section 137(1)]:

    A One Person Company shall file a copy of the financial statements duly adopted by its member, along with all the documents  which are required to be attached to such financial statements, within 180 days from the closure of the financial year.

  4. Company having subsidiaries [Section 137(1)]:

    A company shall, along with its financial statements to be filed with the Registrar, attach the accounts of its subsidiary or subsidiaries which have been incorporated outside India and which have not established their place of business in India (fourth proviso to Section 137(1)).

    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.

    It has also been clarified vide General Circular no. 11/2015 dated 21 July 2015 that in case of foreign company which is not required to get its accounts audited as per the legal requirements prevalent in the country of its incorporation and which does not get such accounts audited, the holding or parent Indian company may place or file such unaudited accounts to comply with requirements of section 136(1) and 137(1) as applicable. These, however, would need to be translated in English, if the original accounts are not in English. Further, the format of accounts of foreign subsidiaries should be, as far as possible, in accordance with requirements under the Companies Act, 2013. In case this is not possible, a statement indicating the reasons for deviation may be placed/ filed along with such accounts.

    Example 10: Vandana Ltd., based out of India, has many subsidiaries in India and outside India. It also had associates and joint ventures. For the purpose of finalization of the consolidated financial statements of the  company for the year ended 31 March 2019, the company’s management requested its foreign subsidiary, based out of Italy, to provide its standalone financial statements. The Italian subsidiary company prepares its financial statements in the local language of the country and the same is provided to the Indian parent company as unaudited as the audit is not required by the Italian subsidiary company. Please advise how should the Indian parent deal with this financial statement.

    Answer: Vandana Ltd. would have to get the standalone financial statements of Italian subsidiary company translated in English language and also get those aligned as per the its accounting policies for the purpose of consolidation.

    Further as per the requirements of section 137(1) of the Companies Act 2013, Vandana Ltd. would need to file such unaudited financial statement of Italian subsidiary company along with a declaration to this effect along with a translated copy of the financial statement in English.

    Further the format of accounts of Italian subsidiary company should be, as far as possible, in accordance with requirements under the Companies Act, 2013. In case this is not possible, a statement indicating the reasons for deviation may be placed/ filed along with such accounts.
  5. Annual General meeting not held [Section 137(2)]:

    Where the AGM of a company for any year has not been held, the financial statements along with the documents required to be attached, duly signed along with the statement of facts and reasons for not holding the AGM shall be filed with the Registrar within thirty days of the last date before which the AGM should have been held and in such manner, with such fees or additional fees as may be prescribed.

  6. Penalty [Section 137(3)]: If any of the provisions of this section are contravened-

    (a) The company shall be liable to a penalty of 1,000 for every day during which the failure continues but which shall not be more than 10 lacs; and
    (b) The managing director and the Chief Financial Officer of the company, if any, and, in the absence of the managing director and the Chief Financial Officer, any other director who is charged by the Board with the responsibility of complying with the provisions of this section, and, in the absence of any such director, all the directors of the company, shall be:

    liable to a penalty which shall not be less than 1 lac , and in case of continuing failure, with further penalty of one hundred rupees for each day after the first during which such failure continues, subject to a maximum of five lacs rupees

    Person LiablePunishment for contravention of section 137
    CompanyWith fine of 1,000 for every day during which the failure continues to a maximum 10 lakhs
    Officers
    MD and CFO of the company, if any:
    In their absence any other director who is charged by the board with the responsibility; In its absence, all the directors of the company
    Fine which shall not be less than 1 lakh and in case of continuing failure, with further penalty of one hundred rupees for each day after the first during which such failure continues, subject to a maximum of five lakhs rupees
Example 11: The AGM of R Ltd., for laying the Annual Accounts there at for the year ended 31 March 2018 was not held. What remedy is available with the company regarding compliance of the provisions of section 137 of the Companies Act, 2013 for filing of copies of financial statements with the Registrar of Companies?

Answer: In the present case, though AGM was not held, it ought to be held by 30 September 2018 under sections 96 of the Companies Act, 2013.

Therefore, under the provisions of section 137(2), the financial statements along with the documents required to be attached under this Act, duly signed along with the statement of facts and reasons for not holding the AGM shall be filed with the Registrar within thirty days of the last date before which the AGM should have been held i.e. by 30 October 2018 along with such fees or additional fees as may be prescribed.

Example 12: Will it make any difference in case the Annual Accounts were duly laid before the AGM held on 27 September 2018 but the same were not adopted by the shareholders?

Answer: Since the AGM has been held in time on 27 September 2018, the un-adopted financial statements along with the required documents under sub-section (1) of section 137 shall be filed with the Registrar within thirty days of the date of AGM and the Registrar shall take them in his records as provisional till the financial statements are filed with him after its adoption in the adjourned AGM for that purpose.



12. INTERNAL AUDIT [SECTION 138]

Section 138 read with Rule 13 of the Companies (Accounts) Rules 2014, provides for internal audit in a company.

Section 138 states that:

(1) Such class or classes of companies as may be prescribed shall be required to appoint an internal auditor, who shall either be a chartered accountant or a cost accountant, or such other professional as may be decided by the Board to conduct internal audit of the functions and activities of the company.

(2) The Central Government may, by rules, prescribe the manner and the intervals in which the internal audit shall be conducted and reported to the Board.
 
Rule 13 of the Companies (Accounts) rules, 2014 states that:

(i) Companies required to appoint Internal Auditor:

(a) The following class of companies shall be required to appoint an internal auditor which may be either an individual or a partnership firm or a body corporate, namely:

(1) every listed company;
(2) every unlisted public company having-
  1. paid up share capital of 50 crore rupees or more during the preceding financial year; or
  2. turnover of 200 crore rupees or more during the preceding financial year; or
  3. outstanding loans or borrowings from banks or public financial institutions exceeding 100 crore rupees or more at any point of time during the preceding financial year; or
  4. outstanding deposits of 25 crore rupees or more at any point of time during the preceding financial year; and
(3) every private company having—
  1. turnover of 200 crore rupees or more during the preceding financial year; or
  2. outstanding loans or borrowings from banks or public financial institutions exceeding 100 crore rupees or more at any point of time during the preceding financial year.
(b) The Audit Committee of the company or the Board shall, in consultation with the Internal Auditor, formulate the scope, functioning, periodicity and methodology for conducting the internal audit.


(ii) Transitional period:
  
An existing company covered under any of the above criteria shall comply  with the requirements of section 138 and this rule within 6 months of commencement of such section.

(iii) Who is Internal Auditor

Internal Auditor shall either be a Chartered Accountant or a Cost Accountant, or such other professional as may be decided by the Board to conduct internal audit of the functions and activities of the company.

The term “Chartered Accountant” or “Cost Accountant” shall mean a “Chartered Accountant” or a “Cost Accountant”, as the case may be, whether engaged in practice or not’.

The internal auditor may or may not be an employee of the company.

Example 13: Perfect Ltd is a listed company. The company is in the business of manufacturing of steel and had its head office at Karnataka. The company’s operations are spread out across India. The company appointed a firm of Chartered Accountants, N & Co LLP, as its internal auditors for the year ended 31st March 2019. However, for the financial year 2019-20, the company is planning to have an in-house internal audit system commensurate with its size and operations. If the company does that then it is planning not to continue with N & Co LLP as its internal auditors. Please advise.

Answer: In the given situation, if the internal audit function of the company is fine as per its size and operations then it may decide not to continue with N & Co LLP.
 

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