Preparation of Board’s Report under the Companies Act, 2013, can be co-related to putting a jig-saw puzzle in place, because of the quantum of information that needs to be obtained and put in place forthe same.
It is a welcome move that there are lot of disclosures/information which are required to made by the Board of Directors in their report, which in turn enables transparency as to the operations and managementinthecompany,thereby betterCorporateGovernance.
It is observed that most of the disclosures which are required to be given in the Board’s Report including its Annexures, and those in the Annual Return, are arranged in such a way so as to cross-verify/correlate one fact with a figure somewhere mentioned, or a figure with a fact. For example, if a Company discloses some information as to related party transactions on arms-length basis in AOC-2 (which is an annexure to the Board’ Report), then there is a disclosure in the Annual return (MGT-7) in which the company needs to give the details of filings as to the members approvals obtained for the same.
Preparation of Board’s Report varies from company to company and depending upon the nature of business, transactions and other criteria, and accordingly, Report of one Company cannot be used as a template, as such, for another company.
The provisions as to Board’s report are contained in Section 134 of the Companies Act, 2013 and rules framed thereunder, and the same are applicable to allthe companies including Small Companies and One Person Companies [OPCs], except for some of the disclosures which are applicable for Listed Companies and Public Limited Company with prescribed threshold limits as to Paid-up Capital and Turnover.
An effort has been made to bring out to list the disclosures which are required to be provided in the Board’s report by a PRIVATE COMPANY (whether the said company is a Small Company or not; and OPCs).
Contents/Disclosures required to be made in the Board’s Report:
134(3) (a) - Extract of the Annual Return as per Section 92(3) in Form MGT-9:
The major change in the Board’s Report under the Companies Act, 2013, in comparison with its counterpart under Companies Act, 1956, is that of inclusion of Extract of Annual Return, as an Annexure to the Director’s Report.
Rule 12(1) of the Companies (Management and Administration) Rules, 2014, prescribes the format of the Extract to the Annual Return in MGT-9.
The point to be noted here is, under the Companies Act, 1956, normally, the Annual Return was prepared after the completion of the Annual General Meeting, with the details standing as on the AGM Date. However under the Companies Act, 2013, the information standing as on 31.03.2015 (Financial Year end Date) is to be provided in the Annual Return.
Since the extract of Annual Return is to be annexed to the Board’s Report, for circulation to all the members, it is a worth-while point to be noted that the Annual Return should be ready by the time, the Board’s Report is being prepared.
134(3) (b) - Number of meetings of the Board of Directors:
This disclosure is similar to that of the Listed Companies, pursuant to the listing agreement. The information as to the number of Board meetings held during the Financial year is to be provided, along with the details astothe Directors who attended the said meeting.
The similar information again appears in the Annual Return, so care should be taken as to the giving the said information.
Point to be noted:
All are aware that pursuant to Section 167 (1) (a), the office of a Director is vacated, if the said Director absents himself from all the meetings of the Board of Directors held during a period of 12 months with or without seeking leave of absence. So any information provided in the Board’s Report or Annual Return, which results in triggering of the provision, may result in thevacation of the office of the said director.
Notice of the Board meetings, Minutes and their attendance during the Financial Year shall have to be verified, so as to see that whether or not, they are in conformity with the requirements under Section 173 of the Act.
134 (3) (c)- Directors’ Responsibility Statement:
The Statement under the Directors’ Responsibility Statement under Section 134 (3) (c) the Companies Act, 2013, is similar to that under Section 217 (2AA) of the Companies Act, 1956, except for the fact that, TWO newstatements have been added which are as below:
“(e) the directors, in the case of a listed company, had laid down intern al financial controls to be follo wed by the company and that such internal financial controls are adequate and were operating effectively.
(f) the directors had devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively.”
~ Of both the new inclusions, the statement (e) as to Internal Financial Controls is required to be provided by a Listed Company, but it does not mean that Private Companies are exempted from having internal financial controls, because, “Internal Financial Controls” (IFCs) 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.
From the above, it is clearly evident that IFCs are also applicable to Private Limited Companies. The only exemption provided is that the Board of Directors of a Private Limited Company are not required to provide such declaration, as part of their Directors’ Responsibility Statement in the Board Report.
~ Apart from the above, as per statement (f) the directors have to give a statement that they had devised proper systems in compliance with the applicable laws and there are operating effectively.
From the above, it can be seen that the above cannot be just statements, and the Director’s should kno as to the aspects, as to which they are taking the responsibility by providing this statement in the Board’s Report.
134(3) (ca) -Frauds reported byAuditors pursuantto Section 143(12):
This disclosure was included vide the Companies (Amendment) Act, 2015 [No.21 of 2015], which came in to effect with effect from26.05.2015. Accordingly, a new sub-clause (ca) has been added after the sub-clause (c) of Sub-section (3) of Section 134, and the provisions of sub-section (12) of Section 143 amended accordingly.
Accordingly, the details of Frauds reported by auditors under sub-section (12) of section 143 other than those which are reportable to the Central Government are to be disclosed in the Director’s Report.
Till date, the Central Government is yet to prescribe the limit or amount of fraud involved, of which need to be reported to the Central Government and below which to the Audit Committee or the Board of Directors.
In view of the above, the details of frauds, if any reported bytheAuditorsto the Company, can be included as part of the Board’s Report underthis disclosure.
134(3) (d) - Statement on declaration given by independent directors pursuant to Section 149(6):
The requirement as to appointment of Independent Director is applicable only for (I) Listed Companies;(ii) the Public Companies having paid up share capital of Rs.10 Crores or more; or (iii) the Public Companies having turnover of Rs. 100 Crores or more; or (iv) the Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding Rs. 50 Crores. [Paid-up capital and Turnover, as on the last date of latest audited financial statements hall be taken into account].
Since a Private Limited Company is not covered under the criteria, it need not appoint Independent Directors on its Board, and accordingly, requirement to give a statement in the Board’s Report as to the independence of the Independent Directors is not applicable to it.
134(3) (e) – Constitution of Nomination and Remuneration Committee:
The requirement as to constitution of Nomination and Remuneration Committee of the Board of Directors is applicable only for (i) Listed Companies; (ii) the Public Companies having paid up share capital of Rs. 10 Crores or more; or (iii) the Public Companies having turnover of Rs.100 Crores or more; or (iv) the Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding Rs. 50 Crores. [Paid-up capital and Turnover, as on the last date of latest audited financial statements hall be taken into account]
The responsibility of the Committees is to frame policies on Director’s 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;
Since a Private Limited Company is not covered underthe criteria, it need not constitute Nomination and Remuneration Committee, and accordingly, the disclosure as to the same is not applicable to it.
134 (3) (f) - Explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made:
This disclosure is similar to the disclosure under 217(3) of the Companies Act, 1956, except for the fact that, now, in addition to the explanation for the qualifications of the Statutory Auditors,a Company, which has appointed a Secretarial Auditor pursuant to Section 204 of the Companies Act, 2013, needs to give replies in the Board report, forthe qualifications, if any, given by the Secretarial Auditor.
However, the requirement as to appointment of a Secretarial Auditor is applicable for Public Companies with the following criteria:
~ having a paid-up share capital of Rs.50 Crores or more; or
~ having a turnover of Rs.250 Crores or more
As, a Private Company is not covered under the criteria for appointment of SecretarialAuditor, it would be enough that the Board provides replies/explanations for the qualifications/remarks as contained in the report of the Statutory Auditors.
134(3) (g) - Particulars of loans, guarantees or investments under Section 186:
The details of the Loans granted but the Company, Guarantees or securities provided or Investments made by the Company are to be disclosed in the Board’ Report.
It is to note that, for the said disclosure, there is no specific format is provided under the Act and accordingly, a Company may adapt the Form MBP-2 [being the Register of Loans, Guarantees/Security and Acquisitions made bythe Company], and come-up with a format of disclosure.
The information/disclosure is again a check-point, to see whether the loans or guarantees/Securities or investments are with-in the limits of Section 186, and whether approval of the members were obtained for loans/guarantees or investments exceeding the limits.
134(3) (h) - Particulars of contracts or arrangements with related parties:
Under the Companies Act, 1956, there was no specific disclosure in the Board’s Report, as related party transactions, butthe same were provided in thefinancials underAS-18.
Whereas the Companies Act, 2013, has defined the term “Related Party”, and Section 188 provides for compliances as to related partytransactions.
Rules 8(2) of the Companies (Accounts) Rules, 2014, prescribes the format of the disclosure asAOC-2, to be annexed to the Board’s Report.
Accordingly, the details as to EACH of the contract or arrangement with the related parties whether done (i) at arm’s length basis; and/or (ii) not at arm’s len gth basis, areto be disclosures in the Board’s report.
134(3) (i) - State of the Company’s affairs:
Under this item, the financial position of the Company, i.e., Turnover, Expenditure, Profit before taxes, Profit after taxes, and the surplus transferred to the Balance sheet pertaining to the current year in comparison with the previousyear can be given in theform of a simpletable.
Further, the future outlook of the Directors, on the business and any other information which the Directors intend to provide, can also be mentioned as a small brief.
134 (3)(j)– Transferto reserves:
Information as to transfer of profits to reserves, if any, is required to be provided as a disclosure.
134(3) (k) – Information as to Dividend:
The information as to the dividend proposed to be paid to the members, including interim dividend, declared and paid to the members, and whether the interim dividend already paid is to be considered as final dividend, or any final dividend in addition to the Interim Dividend is proposed to be paid, is to be provided.
In case, the Board of Directors did not recommended any dividend on account on insufficient profits or with an intention to plough back the profits, the same can be mentioned under this disclosure, as a reason for not recommending the dividend forthe year.
134(3) (l) - Material changes and commitments, affecting the financial position of the company:
Any material changes and commitments, which have occurred between the end of the financial year and up to the date of the Report, and which will have a bearing affect on the financial position of the company, needsto be disclosed.
134(3) (m) - Conservation of Energy, Technology Absorption, Foreign Exchange Earnings and Outgo:
This information is similar to the information provided under Section 217(1) (e) of the Companies Act, 1956 read with the Companies (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988.
Rule 8(3) of the Companies (Accounts) Rules, 2014, lists out the disclosure which are required to be given.
The disclosures as to conservation of Energy, Technology Absorption, Foreign Exchange Earnings and Outgo, under the Companies Act, 1956 and 2013, remain by and large the same, except for one small difference that under Section 217 (1)(e) of the Companies Act, 1956, read with the Companies (Disclosure of Particulars in the Report of Board of Directors) Rules,1988, companies operating in a particular Sectors/Industries, had to disclose details as to Power consumption in the Directors’ report, in Form A as annexed to the Rules, which is not required under the Companies Act, 2013.
Apart from the disclosure of Power/Energy Conservation, those companies were also required to provide the details as to Research and Development, Technology absorption, adaption and innovation in Form B annexed to the Companies (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988, which now under the Companies Act, 2013, is required to be given by all the Companies, subject to the applicabilityof the said disclosuretothem.
134(3) (n) - Statement indicating development and implementation of a risk management policy for the company including identification therein of elements of risk, as identified by the Company:
This is a new disclosure to be given, and even made applicable to Private Companies.
The Board of Directors have to identify the risks involved in the business. Risk may be internal risks, external risks.
After the identification of the risks in the operations of the Company, the Board of Directors need to formulate a risk management policy and take steps for implementation of the said Risk Management Policy, and to this effect a disclosure as to the presence and implementation of the said Risk Management Policy, isto be given in the Report of the Board.
134(3)(o)–Corporate Social Responsibility:
Every company having Net worth of Rs.500 Crores or more, orTurnover of Rs.1,000 Crores or a Net profit of Rs.5 Crores or more during anyfinancial year, is required to constitute a Corporate Social Responsibility Committee, frame a Corporate Responsibility Policy; and is required to spend at least 2% of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy.
Pursuant to Rule 9 of the Companies (Accounts) Rules, 2014, the Company is required to disclose the details as to the constitution of the CSR Committee, and the information as to the CSR activities undertaken as an Annual Report in the format as prescribed under Rule 8 of the Companies (Corporate Social Responsibility Policy) Rules, 2014. The said Annual Report on CSR activities is to be annexed to the Board’s Report.
134(3) (p) – Board Evaluation on its performance:
Since the requirement of constitution of Nomination and Remuneration Committee of the Board of Directors is not applicable to Private Companies, the concept of evaluation of the performance of Board is not applicable to them.
OTHER DISCLOSURESAS PER RULES UNDERTHE VARIOUS CHAPTERS UNDERTHEACT
Disclosures under Chapter– IV-The Companies (Share Capital and Debentures) Rules, 2014, and rules framed thereunder:
Issue of shares with Differential voting rights:
If the Company had issued shares with differential voting rights during the year, then the details as to the number of Equity shares with differential Voting Rights, details of the differential rights, percentage of shares issued, price at which issued and other details as required pursuant to information pursuant to Rule 4(4) of the Companies (Share Capital and Debentures) Rules, 2014 are to be provided in the Board’s Report.
Sweat EquityShares:
If the Company had issued Sweat Equity shares during the year, the details of the issue as required, pursuant to Rule 8(13) of The Companies (Share Capital and Debentures) Rules, 2014, are to be provided in the Board’s Report.
Employees Stock Options Scheme [ESOPS]:
In case of issue of any ESOPS during the year, the Board’s report for the year, shall contain the disclosure/details relating to ESOPS granted, vested, exercised, lapsed and other information, pursuant to Rule 12(9) of the Companies (Share Capital and Debentures) Rules, 2014.
Disclosure under Chapter– IX– The Companies (Accounts) Rules, 2014, and rules framed thereunder: Information as to Subsidiaries, Associates and Joint Ventures:
Pursuant to Rule 8(1) of the Companies (Accounts) Rules, 2014, the Board’s Report of a Company shall contain a separate section, which shall state/report on the performance and financial position of each of the Subsidiaries, Associates and Joint Venture companies included in the Consolidated Financial Statements. Accordingly, the details as to the performance and financial position of each of the Subsidiaries, Associates andJV companies are to be provided in the Board’s Report.
Further, all are aware that in case a Company is having a Subsidiary, then in addition to preparation of stand-alone financial statement, the Company is also required prepare a consolidated financial statement of the company and of all the subsidiaries in the same form and manner as that of its own; and the same shall have to be laid before the Annual General Meeting of the company along with the laying of its stand-alone financial statement.
Further, it would not be out of place to mention that for the purpose of preparation of Consolidated Financial Statements [CFS], the term “Subsidiary”, shall include an Associate Company and a Joint Venture. However, the Ministry of Corporate Affairs, vide the Companies (Accounts) Amendment Rules, 2014, dated:14. 10.2014, had relaxed the requirement as to preparation of CFS in respect ofAssociate and JV Companies,for the FY2014 – 2015 i.e., with effect from the FY2015 – 2016(01.04.2015 to 31.03.2016), Consolidated Financial Statements are to be prepared even in respect ofAssociate and JVCompanies.
Disclosure under Chapter – XI – The Companies (Appointment and Qualification of Directors) Rules, 2014:
Changes in the Constitution of the Board:
The information as to the changes in the constitution of the Board i.e., appointment and with specific reference to resignation of Directors [pursuantto Section 168(1)] isto be provided in the Board’s Report.
The information/details asto any Directors, who are liable to retire by rotation or any Additional Directors appointed during the year, to be regularised attheAGM, can also be provided under this line item.
Disclosure under Chapter – XIII - The Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, and rules framed thereunder:
Particulars of Employees:
This information is similar to the disclosure under Section 217 (2A) of the Companies Act, 1956, read with the Companies (Particulars of Employees) Rules, 1975 as amended from time to time.
Pursuant to Rule 5 (2) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, the particulars of employees employed in India, drawing remuneration in excess of Rs.5 Lakhs per Month or Rs. 60 Lakhs perfinancialyear, as the case may be, are to be provided.
Further it isto be noted that the particulars of employees posted and working in a country outside India, not being directors or their relatives, drawing more than Rs. 60 Lakhs per financial year or Rs. 5 Lakhs per month, as the case may be, is not required to be circulated to the members in the Board’s report.
OTHER DISCLOSURES
Acceptance of Deposits:
Since a Private Company is not allowed to accept deposits from the General Public, a disclosure is required to be provided confirming the same. Apart from this, in cases where a Private Company had availed deposits from its members, disclosure as to compliance of the provisions of Section 73 of the Companies Act, 2013 read with the Companies (Acceptance of Deposits) Rules, 2014, is to be provided in the Board’s Report.
Details as to Statutory Auditors and Internal
Auditors: StatutoryAuditors:
The details as to the appointment of the Statutory Auditors of the Company; recommendation of the Board of Directors to the Members at the ensuing Annual General Meeting to ratify the appointment of StatutoryAuditors shall be included in the Board’s Report.
In addition to the details of the Statutory Auditors, the Company may also mention the details of the Internal Auditors, appointed, if any, pursuant to the provisions of Section 138 of the Companies Act, 2013 and rules madethereunder.
Disclosure under the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013:
Pursuant to Section 22 of the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013, every employer(Board of Directors/Company) is required to disclose in their Report i.e., the Board’s Report, the details as to the number of harassment complaints which have been received and the status of their disposal.
It is to be noted that this requirement is applicable even if there is one Women employee in the organisation, since there is no specific exemption mentioned anywhere in the Act.
NON-MANDATORY DISCLOSURES
Disclosure under Chapter – XII – The Companies (Meetings of Board and its Powers) Rules, 2014, and rules framed thereunder:
Establishment of Vigil Mechanism:
Pursuant to Rule 7 of the Companies (Meetings of Board and its Powers) Rules, 2014, every company which has borrowed money from banks and public financial institutions in excess of Rs.50 Crores are required to establish a Vigil Mechanism, for the directors and employees of the Company to report their genuine concerns or grievances.
However, there is no mandatory requirement as to informing the presence of the said mechanism in the Board’s Report, and it is upto the Board to disclose the same.
SIGNING OF THE BOARD’S REPORT:
The Board’s ReportalongwithAnnexures if anythereof, shall besigned on behalf ofthe Board by:
~ the Chairperson of the company where he is authorised by the Board; and where he is not authorised;
~ At least byTwo directors, one of whom shall be a Managing Director, or bythe Director where there is one Director. [In case of OPC and Small Company]
PENALTIES FOR CONTRAVENTION OF THE PROVISIONS - Sec.134
8) In case of contravention of the provisions, then:
~ The Company shall be punishable with fine which shall not be less than Rs. 50,000/- but which may extend to Rs. 25,00,000/-; and
~ Every officer 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 Rs. 50,000/-but which may extend to Rs. 5,00,000/- or with both.
This article is contributed by Partners of SBS and Company LLP - Chartered Accountant Company. You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.
