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 (With specific reference to • Subsidiary • Associate • Joint venture companies, including in the consolidated financial statement)

Directors Report under the Companies Act, 2013

Introduction:

Under earlier dispensation, a separate section 217 of the Companies Act, 1956 connected to the Report of Directors. . But in the new the Companies Act, 2013 as updated, a lot of sections deal with various disclosures required in the Director Report.

Furthermore, a listed company is required to comply with disclosures requirement stated under the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015.

THE INSTITUTE OF COMPANY SECRETARIES OF INDIA (ICSI) has also dealt with copiously in its Guidance Note on Report of the Board of Directors

Basis of Board Report:

In the light of the above, the main purpose of the article is only to highlight fact that The Board's Report shall be prepared based on the respective 'Stand alone Financial Statement of the Company', and should relate to the financial year for which such financial statement is prepared.

Basis of Board Report: Based on Standalone Financial Statements But, under separate Section, it should deal with the performance based on financial statements of its subsidiaries, associates, joint ventures including Consolidated Financial statements.

Authorization by Directors - Directors Report:

The Director's Report shall be approved in the Meeting of Board of Directors and it shall be ensured that:

- Approval of Directors report shall not be done by "Circular Resolution" or "by committee".
- Meeting for approval of Directors report shall not be performed by "Video Conferencing".

Who should sign of Director's Report? - refer Sec 134(6)

• A Chairperson (if authorized by the Board of directors of the Company)

• Where, Chairperson is not authorized by Board, then by at least 2 Directors, one of whom shall be a Managing Director, if there is no Managing Director then by 2 Directors.

E-Filling of Resolution approving Board Report:

Post passing the resolution on approving Board Report, it should be ensured without fail the Resolution is filled with ROC in Form MGT - 14, within 30 days from the DOPR

What are the sections that deal with the Directors Report?

Section 134 under various sub-sections deal with the Directors Report along with various other sections referred to in the section, connected therewith

Contents of Board Report:

As per sec. 134(3) shall be attached to statements laid before a company in general meeting, a report by its Board of Directors, which shall include -

 

Sr. No

Items

Details to be disclosed

(a)

The web address

if any, where annual return referred to in sub-section (3) of section 92 has been placed]

(b)

Number of meetings of the Board;

 

(c)

Directors' Responsibility Statement

As per Sec. 134(5) of the Act

@Detailed as hereunder.

(ca)

Details in respect of frauds reported by auditors

under sub-section (12) of section 143other than those which are reportable to the Central Government;]

(d)

A statement of declaration given by independent directors

Please see Para on ‘Who should sign of Director's Report? - refer Sec 134(6)' --above

(e)

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;]

(f)

(i)Comments on Auditor Report.

Explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made - (i) by the auditor in his report;

 

(ii) . Comment on Secretarial Audit Report.

by the company secretary in practice in his secretarial audit report;

(g)

Particulars of loans, guarantees or investments

As required under section 186

(h)

Particulars of related parties' disclosures.

As referred to in section 188 (1) of the Act.

#Detailed as here under

(i)

The state of the company's affairs.

 

(j)

The amounts, if any, which it proposes to, carry to any reserves.

 

(k)

Dividend details.

The amount, if any, which it recommends should be paid by way of dividend

(l)

Material changes and commitments,

if any, affecting the financial position of the company which have occurred between the end of the financial year of the company to which the financial statements relate and the date of the report

(m)

The conservation of energy, technology absorption, foreign exchange earnings and outgo, in such manneras may be prescribed.

See Rule.8 and Form No. AOC 2 of the companies Accounts rules 2014 (Division Two)

(n)

A statement indicating development and implementation of a risk management policy.

For the company including identification therein of elements of risk, if any, which in the opinion of the Board may threaten the existence of the company;

(o)

CSR Policy

The details about the policy developed and implemented by the company on corporate social responsibility initiatives taken during the year.

(p)

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.

(q)

such other matters as may be prescribed.

See Rule.8 and Form No. AOC 2 of the companies Accounts rules 2014 (Division Two)

Disclosure about cost Audit:

- Full particular of cost auditor, along with due date and actual filling of cost audit report by the cost auditor.

@ Directors' Responsibility Statement as per Sec. 134(5)

• in the preparation of the annual accounts, the applicable accounting standards followed along with proper explanation relating to material departures;

• 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;

• 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;

• had prepared the annual accounts on a going concern basis;

• 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.

• Had devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively.

# Particulars of related parties' disclosure:

(1) Except with the consent of the Board of Directors given by a resolution at a meeting of the Board and subject to such conditions as may be prescribed, no company shall enter into any contract or arrangement with a related party with respect to -  (Also ref.)

(a) sale, purchase or supply of any goods or materials;
(b) selling or otherwise disposing of, or buying, property of any kind;
(c) leasing of property of any kind;
(d) availing or rendering of any services;
(e) appointment of any agent for purchase or sale of goods, materials, services or property;
(f) such related party's appointment to any office or place of profit in the company, its subsidiary company or associate company; and

(g) Underwriting the subscription of any securities or derivatives thereof, of the company:

For brevity, provisos and other subsections are not quoted. Please refer the Sections as amended with rules.

Exceptions/ Modifications/ Adaptations:

Disclosure about cost Audit:

Full particular of cost auditor, along with due date and actual filling of cost audit report by the cost auditor

Further Disclosures: as to

• Nomination and Remuneration committee: (Sec (178 (3))
• Vigil Mechanism
• composition of Audit committee and their recommendations (sec. 117(8))
• Declaration by Independent Director
• Relating to Deposit
• Details of Director and KMP
• Disclosure about ESOP and Sweat Equity Share
• Details of employees drawing salary above prescribed limits: (Listed)
• Conservation of energy, technology absorption & foreign exchange dealing: Rule8(3)
• Foreign exchange earnings and Outgo
• And, further

 

But the Board's Report shall include a Separate section wherein a report on the performance and financial position of each:

• Subsidiary
• Associate
• Joint venture companies, including in the consolidated financial statement is presented.

Rule 8(1) of the Companies (Accounts) Rules, 2014 provides that the Report shall be prepared based on the stand alone financial statements of the company and shall contain a separate section wherein the report of the financial position of each of the subsidiaries, associates and joint venture companies, included in the consolidated financial statement is presented, and their contribution to the overall performance of the company during the period under Report. Since the information requirements stipulated in the above Rule are covered as part of the information contained in AOC-1 required under section 129 of the Act, it is an industry practise to refer to AOC-1 in the Report, for the purpose of compliance thereof.

In addition to financial statements provided under sub-section (2), a consolidated financial statement 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)

Major events occurred during the year:

The disclosure under this heading should include a brief description of the nature of business of the company specifying growth achieved in terms of volume of the key products/services of the company, structural changes in the business, new acquisition and development of Intellectual Property Rights, joint ventures and strategic business and technological agreements, divestments, mergers and acquisitions undertaken during the year, etc. Since listed companies also present consolidated financial statements, it is necessary that the key highlights should also include material events relating to subsidiary (ies) which have impacted the state of affairs of the company.

In order to determine whether a particular event or information of a subsidiary is material in nature and will impact the affairs of the company, the company should consider various criteria which could inter alia include whether there would be any direct or indirect impact on the reputation of the company or the omission of an event or information in the Report will either result in any discontinuation or alteration of an event or information already available publicly or is likely to result in significant market reaction if the said omission came to light at a later date. In addition, the

 

Change in the nature of business:

Report should also disclose the details of an event or information of a subsidiary, if the impact of such an event or information is 10% or more of consolidated turnover or consolidated net worth of the holding company.

Regulation 16(1)(c) of the Listing Regulations defines the term 'material subsidiary' as a subsidiary, whose income or net worth exceeds ten percent of the consolidated income or net worth respectively, of the listed entity and its subsidiaries in the immediately preceding accounting year.

Sub-section (1) of section 134 of the Act provides that 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 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. Placing of the Report on the Website the Report shall be placed on the website of the company, if any.

Placing of the Report on the Website:

Third proviso to sub-section (1) of section 136 of the Act states 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.

As a matter of good corporate governance practice, the above requirement is also company extended to unlisted companies having a website.

Further, every listed company having a subsidiary or subsidiaries shall place separate audited accounts in respect of each of subsidiary on its website, if any: Provided also that a listed company which has a subsidiary incorporated outside India (herein referred to as "foreign subsidiary") -

(a) 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.

(b) 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.

FILING AND SUBMISSION OF THE REPORT:

Sub-section (1) of section 137 of the Act provides that a copy of the financial statements, including consolidated financial statement, if any, along with all the documents which are required to be or attached to such financial statements under the Act, duly adopted at the annual general meeting of the company, shall be filed with the Registrar within thirty days of the date of annual general meeting.

Conclusion:

Refer all the relevant Sections of the Act, relevant Listing Regulations and ICSI Guidance Note on Directors Report . 


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Category Corporate Law, Other Articles by - P.R. Sethuraman 



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