In the world of corporate governance, the delicate balance between economic and social objectives and individual and communal interests is akin to a finely tuned orchestra, harmonising diverse tones and elements. At the heart of this symphony is the company, where shareholders, the financial lifeblood of the enterprise, entrust their resources and aspirations. However, in a complex corporate world where shareholders are often numerous and far removed from day-to-day operations, ensuring each investor actively manages the company is a formidable challenge. This is where the essence of mandatory annual disclosure, rooted in Section 2(40) of the Companies Act, 2013, takes centre stage.
Section 2(40), The Companies Act, 20131 defines a company’s “financial statement,” encompassing a balance sheet, a profit and loss account (or an income and expenditure account for non-profit companies), a cash flow statement, and explanatory notes. These financial documents serve as the annual revelation, a spotlight on the company’s financial performance and operations.
In this discourse, we delve into the provisions embedded in Company Law that govern the disclosure of accounts, unravelling the legal framework that empowers shareholders, facilitates informed decision-making, and bridges the gap between individual and communal interests in the corporate landscape.
Section 128, The Companies Act, 20132
Section 128 of the Companies Act, 2013 establishes the fundamental requirements for maintaining proper books of accounts by companies in India. These requirements are crucial for ensuring financial transparency, accuracy, and compliance.
Nature of Bookkeeping: Section 128 mandates that companies must maintain records of specific financial transactions, including money received and expended, sales and purchases of goods and services, and details of assets and liabilities. The accounting system used should be based on the accrual basis and the double-entry system.
Location of Records: These financial records should be kept at the company’s main office, ensuring that they accurately represent the financial health of the company and cover all branches, if applicable.
Electronic Records: The Act permits the storage of these records in electronic format, subject to specific guidelines. However, these electronic records must be accessible within India to ensure their use for future reference.
In essence, Section 128 underscores the importance of accurate and accountable bookkeeping in the corporate sector. It ensures that financial records are comprehensive, based on recognized accounting principles, and maintained for a reasonable period. This promotes transparency, regulatory compliance, and good corporate governance, ultimately contributing to the financial integrity and health of companies in India.
Section 129 – Financial Statements3
This Section seeks to provide that financial statements shall give a true and fair view of the state of affairs of the companies in the form specified in Schedule III for each class or class and shall comply with accounting standards. Insurance companies, banking companies, companies involved in the generation or supply of electricity, and any other type of company must file financial statements in the format specified in or under the Act governing such companies. The financial statement must be included in the annual general meeting.
In the case of subsidiary companies, the company must prepare a consolidated financial statement for the Company and all subsidiaries and present it to the annual general meeting. The Central Government shall have the authority to exempt a class or classes of companies from any of the provisions of this section. The section also specifies the penalty that will be imposed if the company violates the provisions of this section.
Section 130 of the Companies Act
This Act pertains to the re-opening of a company’s accounts and the recasting of its financial statements under specific circumstances. This section outlines the conditions and procedures for such actions.
Re-opening of Accounts:
A company cannot re-open its books of accounts or recast its financial statements unless a valid application is made by one of the following entities:
1. The Central Government
2. Income-tax authorities
3. Securities and Exchange Board of India (SEBI)
4. Other statutory regulatory bodies or authorities
5. Any concerned person
Permissible Reasons:
The re-opening and recasting of financial statements are allowed only under two specific circumstances: If the previous accounts were prepared fraudulently or If the company’s affairs were mismanaged during the relevant period, creating doubts about the reliability of its financial statements. Accounts that have been revised or recast under Section 130 are considered final.
In summary, Section 130 of the Companies Act outlines the specific conditions and procedures under which a company’s accounts can be re-opened and its financial statements recast, with a primary focus on addressing fraudulent activities or mismanagement that may have compromised the reliability of the financial statements.
Section 131 of the Companies Act, 20135
It outlines provisions for the voluntary revision of a company’s financial statements or the board’s report under specific circumstances:
Voluntary Revision: Company directors have the authority to revise financial statements or the board’s report if they believe that the existing financial statements or reports do not comply with the requirements of Section 129 (financial statements) or Section 134 (board’s report).
Tribunal Approval: Before making revisions, the company must obtain approval from the Tribunal. The company is required to apply in a prescribed format. Once the Tribunal grants approval, a copy of the order issued by the Tribunal must be filed with the Registrar of Companies.
Notice and Representation: The Tribunal must notify the Central Government and Income-tax authorities about the application for revision. The Tribunal also considers any representations made by these government bodies before making an order. Revisions can only be made once in a financial year, and detailed reasons for the revisions must be disclosed in the board’s report for the relevant financial year. Revisions are limited to correcting non-compliance with the provisions of Section 129 or Section 134 6 and making consequential alterations.
In essence, Section 131 allows for the voluntary revision of financial statements and board reports by company directors under specific circumstances, subject to approval from the Tribunal and compliance with specified rules and limitations. This provision ensures transparency and accuracy in a company’s financial reporting.
Section 132, The Companies Act, 20137
Section 132 of the Companies Act, 2013, establishes the National Financial Reporting Authority (NFRA) and outlines its functions, powers, and structure as follows:
Constitution of NFRA: The Central Government has the authority to create the National Financial Reporting Authority through a notification. The NFRA is responsible for matters related to accounting and auditing standards under the Companies Act.
Functions of NFRA: The NFRA is empowered to:
a) Make recommendations to the Central Government regarding the formulation and establishment of accounting and auditing policies and standards for adoption by companies or specific classes of companies and their auditors.
b) Monitor and enforce compliance with accounting and auditing standards as prescribed.
c) Oversee and enhance the quality of services provided by professionals involved in ensuring compliance with these standards.
d) Perform other functions related to the above as may be prescribed.
Composition of NFRA: The NFRA consists of a chairperson, who must be an individual with expertise in accountancy, auditing, finance, or law, appointed by the Central Government. It may also have up to fifteen members, including part-time and full-time members, as prescribed. The terms, conditions, and appointment processes for the Chairperson and members are specified in regulations, with an emphasis on ensuring independence and no conflict of interest.
Powers of NFRA: The NFRA has significant investigative powers. It can investigate professional or other misconduct committed by members or firms of chartered accountants registered under the Chartered Accountants Act, of 1949. It can impose penalties and debar individuals or firms from practice as chartered accountants for a specified period if misconduct is proven.
Appeals: Individuals aggrieved by NFA’s orders can appeal to an Appellate Authority constituted by the Central Government. The terms and conditions for the Appellate Authority, including appointment and procedures, are specified in the regulations.
Accounts and Reports: The NFRA is required to maintain accounts, which are audited by the Comptroller and Auditor-General of India. Annual reports are prepared, including audit reports, and presented to the Central Government and Parliament.
In summary, Section 132 establishes the National Financial Reporting Authority (NFRA), which is responsible for overseeing accounting and auditing standards, monitoring compliance, investigating misconduct, and maintaining accountability in the accounting profession. It also has the power to impose penalties and sanctions for professional misconduct. The NFRA’s composition, powers, and functions are subject to specific regulations, ensuring transparency and integrity in financial reporting and auditing practices.
Section-133, The Companies Act, 20138
This section, as outlined in the Companies Act, 2013, grants the Central Government the authority to prescribe accounting standards or any addendum to these standards. These standards are typically recommended by the Institute of Chartered Accountants of India (ICAI), which was established under the Chartered Accountants Act, 1949.
1. Prescription of Accounting Standards: The Central Government has the power to prescribe accounting standards. These standards are typically suggested by the ICAI, which is a professional regulatory body for chartered accountants in India.
2. Consultation with NFRA: Before prescribing these standards, the Central Government is required to consult with and examine recommendations from the National Financial Reporting Authority (NFRA). This consultative process ensures that the standards are in alignment with the broader regulatory framework and take into account issues related to financial reporting and auditing.
Section-134, The Companies Act, 20139
Section 134 of the Companies Act, 2013, outlines key requirements related to financial statements and reports for companies. The section can be summarised as follows:
Approval of Financial Statements:
Financial statements, including consolidated financial statements if applicable, must be approved by the company’s Board of Directors before they are signed on behalf of the Board. The signing can be done by the chairperson (if authorised), two directors (including one managing director and the Chief Executive Officer if a director), the Chief Financial Officer, and the company secretary.
Auditor’s Report: The auditor’s report must be attached to every financial statement, providing an independent assessment of the financial health and accuracy of the company’s accounts.
Directors’ Responsibility Statement: The Directors’ Responsibility Statement must confirm adherence to accounting standards, appropriate accounting policies, maintenance of accurate accounting records, preparation of accounts on a going concern basis, and the implementation of internal financial controls and compliance systems.
Signatories: The Board’s report and accompanying documents must be signed by the company’s chairperson (if authorised by the Board) or, in the absence of authorization, by at least two directors, one of whom must be a managing director, or by a sole director.
Publication: A signed copy of the financial statement, along with related documents, must be issued, circulated, or published. These documents include notes, the auditor’s report, and the Board’s report.
Section 134 outlines the requirements for the approval, reporting, and publication of financial statements and associated reports by companies. It also mandates the disclosure of various corporate governance and financial information to ensure transparency and accountability. Failure to adhere to these provisions can result in legal consequences.
Section-135, The Companies Act, 201310
Section 135 of the Companies Act, 2013, outlines the provisions for Corporate Social Responsibility (CSR) activities by certain companies. It can be summarised as follows:
CSR Committee Formation: Companies meeting specific financial thresholds, such as a net worth of Rs. 500 crores, a turnover of Rs. 1,000 crores, or a net profit of Rs. 5 crores during any financial year, must establish a Corporate Social Responsibility Committee (CSR Committee) consisting of three or more directors. At least one director on this committee should be an independent director.
Disclosure in Board’s Report: The Board of Directors must disclose the composition of the CSR Committee in the company’s Board’s report under Section 134(3).
Responsibilities of CSR Committee: The CSR Committee has the following responsibilities:
a) Formulate and recommend a Corporate Social Responsibility Policy to the Board, specifying activities to be undertaken as per Schedule VII.
b) Recommend the amount of expenditure to be allocated to the recommended CSR activities.
c) Monitor the implementation of the company’s CSR
CSR Expenditure: Companies subject to this section must spend at least two percent of the average net profits of the previous three financial years on CSR activities. The spending should align with the company’s CSR Policy. Companies are encouraged to give preference to the local areas where they operate for CSR spending. In case the full amount is not spent, the Board must explain the reasons for underspending in the annual report. The section explains that the term “average net profit” should be calculated following the provisions of Section 198.
In summary, Section 135 mandates certain companies to establish a CSR Committee, formulate a CSR Policy, allocate funds for CSR activities, and ensure compliance with CSR provisions. Companies are required to spend a specified percentage of their average net profits on CSR activities and disclose their CSR efforts in their annual reports and on their websites. Failure to meet CSR spending obligations should be explained in the annual report.
Section – 136, The Companies Act, 201311
Section 136 of the Companies Act, as described, outlines the rights of members and debenture-holders in a company regarding access to financial statements and related documents. It also sets out the consequences for non-compliance with these provisions
Distribution of Financial Statements: Companies are required to send copies of their financial statements, including auditor’s reports and any legally mandated attachments, to every member, trustee for debenture-holders, and other entitled persons at least 21 days before the general meeting. Listed companies can fulfil this requirement by making the documents available for inspection at their registered office and sending a summary to members unless they request the full financial statements.
Online Disclosure for Listed Companies: Listed companies must publish their financial statements and related documents, including consolidated financial statements, on their official website. If a company has subsidiaries, they must also separately display the audited accounts of each subsidiary on their website.
Inspection Rights: Members and debenture-holders are entitled to inspect these documents at the company’s registered office during business hours.
Penalties for Non-compliance: Companies failing to comply with these requirements face a penalty of ₹25,000, and responsible company officers can be penalised with ₹5,000
The section emphasises transparency and accountability in financial reporting for companies. It ensures that stakeholders have access to financial information well in advance of general meetings, and it encourages online publication of financial documents for greater accessibility. Failure to adhere to these rules results in financial penalties.
Section – 137, The Companies Act, 201312
Section 137 of the Companies Act primarily deals with the filing of financial statements with the Registrar of Companies. Here is a summary of the key provisions of this section:
Filing of Financial Statements: Companies are required to file a copy of their financial statements, including consolidated financial statements if applicable, with the Registrar of Companies. These statements must be those duly adopted at the annual general meeting of the company.
Timeframe for Filing: The financial statements should be filed within thirty days from the date of the annual general meeting. The specific manner of filing, associated fees, and additional fees are to be prescribed.
Unadopted Financial Statements: If the financial statements were not adopted at the annual general meeting, unadopted financial statements along with the required documents should be filed within thirty days of the meeting. The Registrar will provisionally accept them until they are adopted in an adjourned annual general meeting.
This section underscores the importance of timely and accurate financial reporting and imposes penalties for non-compliance to ensure transparency and accountability in company financial matters.
Section – 138, The Companies Act, 201313
Section 138 of the Companies Act pertains to the requirement for certain classes of companies to appoint an internal auditor.
Mandatory Internal Audit: This section mandates that specific categories of companies, as determined by rules prescribed by the Central Government, must appoint an internal auditor. The purpose of the internal auditor is to evaluate and audit the functions and activities of the company to ensure financial transparency and compliance with applicable laws and regulations.
Qualifications of Internal Auditor: The internal auditor must meet certain qualifications. They can be either a chartered accountant, a cost accountant, or any other qualified professional as decided by the Board of Directors. These professionals are responsible for conducting an independent and objective assessment of the company’s internal processes, financial transactions, and compliance with statutory requirements.
Regulations by Central Government: The Central Government has the authority to establish rules specifying how internal audits should be conducted, as well as the frequency and intervals at which these audits must be carried out. These rules help ensure that internal audits are performed consistently and effectively.
In summary, Section 138 requires specific classes of companies, as determined by the Central Government, to appoint an internal auditor who is a qualified professional. This auditor is responsible for conducting regular internal audits to assess the company’s operations, financial activities, and compliance with legal and regulatory requirements.
Conclusion
The Companies Act, of 201314, weaves a robust framework for financial transparency and accountability. Beginning with Section 128’s mandate for proper bookkeeping, it extends into a network of regulations. Section 2(40) compels annual financial disclosure, fostering trust and aligning economic and social goals. Sections 130, 131, and 132 rectify financial statements when needed, preventing misuse. Section 133 empowers the government to set accounting standards, while Section 134 guides responsible financial statement presentation. Section 135 promotes Corporate Social Responsibility, extending corporate roles. Section 138 introduces internal audits for compliance. Together, these sections underscore India’s commitment to corporate governance, ensuring integrity, transparency, and equity in the business landscape.
Endnotes
1. The Companies Act, 2013 (No.18 of 2013), ss.40,2
2. The Companies Act, 2013 (No.18 of 2013), s 128
3. The Companies Act, 2013 (No.18 of 2013), s 129.
4. The Companies Act, 2013 (No.18 of 2013), s 130.
5. The Companies Act, 2013 (No.18 of 2013), s 131.
6. The Companies Act, 2013 (No.18 of 2013), s 134.
7. The Companies Act, 2013 (No.18 of 2013), s 132.
8. The Companies Act, 2013 (No.18 of 2013), s 133.
9. The Companies Act, 2013 (No.18 of 2013), s 134.
10. The Companies Act, 2013 (No.18 of 2013), s 135.
11. The Companies Act, 2013 (No.18 of 2013), s 136.
12. The Companies Act, 2013 (No.18 of 2013), s 137.
13. The Companies Act, 2013 (No.18 of 2013), s 138.
14. The Companies Act, 2013 (No.18 of 2013)