THE LEGAL BRIDGE

Judiciary & Law Notes Series

THE COMPANIES ACT, 2013

CHAPTER IX

Accounts of Companies

Sections 128–138

For Judicial Service Aspirants & Law Students

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Books of Account • Financial Statements • CSR • NFRA

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Chapter IX — Accounts of Companies

A company is a legal person which exists through documents. Its most important documents are those which record its financial life — the books of account, the financial statements, and the Board's report. Chapter IX of the Companies Act, 2013 (Sections 128 to 138) codifies the duty to maintain books, the form and content of financial statements, the responsibility for their preparation, the Corporate Social Responsibility (CSR) obligation, the statutory audit interface, and the internal audit requirement.

This chapter — together with Chapter X (Audit) — constitutes the accountability architecture of the 2013 Act. The inclusion of Section 135 (CSR), making India the first country in the world to enact a mandatory CSR statute, is particularly significant and examinable.

Section 128 — Books of Account to be Kept by Company

Every company shall prepare and keep at its registered office books of account and other relevant books and papers and financial statement for every financial year which give a true and fair view of the state of the affairs of the company, including that of its branch office or offices, if any, and explain the transactions effected both at the registered office and its branches and such books shall be kept on accrual basis and according to the double-entry system of accounting.

• Books may be kept at a place other than the registered office, if the Board of Directors so decides, and a notice in writing giving the full address of that other place is filed with the Registrar within 7 days.
• Electronic mode of maintenance is permissible, subject to Rule 3 of the Companies (Accounts) Rules, 2014 — which requires the books and records in electronic mode to remain accessible in India at all times, to be capable of being displayed in legible form, and to be retained completely in the format they were originally generated.
• The company shall preserve the books of account together with the vouchers relevant to any entry in such books of account for a minimum period of eight financial years immediately preceding the financial year.
• Where an investigation has been ordered in respect of the company under Chapter XIV, the Central Government may direct that the books of account may be kept for such longer period as it may deem fit.

The persons responsible for compliance are: the managing director, the whole-time director in charge of finance, the Chief Financial Officer (CFO), or any other person charged by the Board with the duty of complying with this section. Default attracts imprisonment for a term which may extend to 1 year, or fine between ₹50,000 and ₹5,00,000, or with both.

Section 129 — Financial Statement

The financial statements shall give a true and fair view of the state of affairs of the company, 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.

'Financial Statement' is defined under Section 2(40) to include:

1. A balance sheet as at the end of the financial year;A profit and loss account, or in the case of a company carrying on any activity not for profit, an income and expenditure account for the financial year;Cash flow statement for the financial year;A statement of changes in equity, if applicable;Any explanatory note annexed to, or forming part of, any document referred to above.

The proviso to Section 2(40) exempts OPC, small company, dormant company, and private company (if such private company is a start-up) from preparing a cash flow statement.

(3) Consolidated Financial Statements (CFS)

Where a company has one or more subsidiaries or associate companies, it shall, in addition to its own financial statements, prepare 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 lay it before the AGM of the company.

A 'subsidiary' for this purpose includes an associate company and a joint venture. 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 the prescribed Form AOC-1.

(5) National Financial Reporting Authority (NFRA)

The Central Government, by notification, may direct that the accounts of any class or classes of companies, as may be specified in the notification, shall, to such extent as may be specified, comply with the accounting standards prescribed under the advice of the National Financial Reporting Authority (Section 132). NFRA has been constituted under Section 132 w.e.f. 1 October 2018 and is the principal accounting regulator for listed and large unlisted companies.

Section 130 — Re-opening of Accounts on Court's or Tribunal's Orders

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 the Central Government, the Income-tax authorities, the Securities and Exchange Board, or 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. The Tribunal shall give notice to the Central Government, etc., and take their representations into consideration before passing any order.

Section 131 — Voluntary Revision of Financial Statements or Board's Report

If it appears to the directors of a company that the financial statement of the company, or the Board's report, do not comply with the provisions of Section 129 or Section 134, they may prepare revised financial statements or a revised Board's 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. A copy of the order passed by the Tribunal shall be filed with the Registrar.

Section 132 — Constitution of National Financial Reporting Authority (NFRA)

NFRA is the independent regulator for:

• Listed companies;
• Unlisted public companies having paid-up capital of ₹500 crore or more, or annual turnover of ₹1,000 crore or more, or aggregate of outstanding loans/debentures/deposits of ₹500 crore or more on 31 March of the immediately preceding financial year;
• Insurance companies, banking companies, electricity companies, and other companies governed by special Acts;
• Any other body corporate or company or person on a reference made by the Central Government in public interest.

NFRA has powers to make recommendations on accounting and auditing standards, monitor and enforce compliance, oversee the quality of service of auditors, investigate professional or other misconduct, and impose penalty on any auditor or firm of auditors ranging from ₹1 lakh to 5 times of the fees received (for an individual) and ₹5 lakh to 10 times of the fees received (for firms), along with debarment from practice for 6 months to 10 years.

Section 133 — Central Government to Prescribe Accounting Standards

The Central Government may prescribe the standards of accounting or any addendum thereto, as recommended by the Institute of Chartered Accountants of India, constituted under Section 3 of the Chartered Accountants Act, 1949, in consultation with and after examination of the recommendations made by NFRA. The Indian Accounting Standards (Ind AS) have been notified under the Companies (Indian Accounting Standards) Rules, 2015 and are applicable in a phased manner.

Section 134 — Financial Statement, Board's Report, etc.

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 the managing director and the CFO, the CEO (if he is a director), and the Company Secretary, wherever they are appointed.

Contents of Board's Report

The Board's Report is a narrative document annexed to the financial statements and laid before the members at the AGM. Under Section 134(3), it must include:

1. The web address, if any, where annual return referred to in section 92(3) has been placed;Number of meetings of the Board;Directors' Responsibility Statement;Details of frauds reported by auditors under section 143(12);A statement on declaration given by independent directors under section 149(6);Company's policy on directors' appointment and remuneration (Section 178);Explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made by the auditor and company secretary in practice;Particulars of loans, guarantees or investments under section 186;Particulars of contracts or arrangements with related parties under section 188 in Form AOC-2;State of the company's affairs;Amount proposed to be carried to reserves;Amount recommended as dividend;Material changes and commitments affecting the financial position of the company which have occurred between the end of the financial year and the date of the report;Conservation of energy, technology absorption, foreign exchange earnings and outgo;Risk management policy;CSR policy and initiatives (Section 135);Formal annual evaluation of Board performance and individual directors;Such other matters as may be prescribed.

Directors' Responsibility Statement [Section 134(5)]

The Directors' Responsibility Statement shall state:

1. That in the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures;That 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 and of its profit/loss;That the directors had taken proper and sufficient care for the maintenance of adequate accounting records;That the directors had prepared the annual accounts on a going concern basis;That the directors, in case of 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; andThat 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.

Section 135 — Corporate Social Responsibility (CSR)

Every company having net worth of ₹500 crore or more, or turnover of ₹1,000 crore or more or a net profit of ₹5 crore or more during the immediately preceding financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.

Originally framed as a 'comply or explain' provision, CSR was made mandatorily spending-binding by the Companies (Amendment) Act, 2019, and further refined by the Companies (Amendment) Act, 2020. The current position is:

• The Board shall ensure that the company spends, in every financial year, at least 2% of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its CSR Policy.
• Where the company has not completed the period of three financial years since its incorporation, the 2% requirement is calculated on the average net profits of such immediately preceding financial years as the company has completed.
• If the company fails to spend such amount, the Board shall, in its report, specify the reasons for not spending the amount. Any unspent amount which pertains to an ongoing project shall be transferred by the company within 30 days of end of the financial year to a special account — Unspent CSR Account — and spent within 3 financial years.
• Unspent amount which does not pertain to an ongoing project shall be transferred within 6 months of the expiry of the financial year to a Fund specified in Schedule VII.
• Penalty for non-compliance: Company — twice the unspent amount required to be transferred, or ₹1 crore, whichever is less; Officer in default — 1/10th of the unspent amount required to be transferred, or ₹2 lakh, whichever is less.

Schedule VII — Activities Eligible for CSR Spending

Schedule VII contains a broad indicative list including: eradicating hunger, poverty and malnutrition; promoting healthcare including preventive healthcare and sanitation; promoting education, including special education and employment-enhancing vocation skills; promoting gender equality, empowering women, setting up homes and hostels for women and orphans; reducing child mortality and improving maternal health; ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agro-forestry, conservation of natural resources; protection of national heritage, art and culture; measures for the benefit of armed forces veterans; training to promote rural sports, nationally recognised sports, and Olympic sports; contribution to the Prime Minister's National Relief Fund or PM CARES Fund or any other fund set up by the Central Government; contribution to incubators or R&D projects; rural development projects; slum area development; and disaster management.

Section 136 — Right of Member to Copies of Audited Financial Statement

A copy of the financial statements, including consolidated financial statements, 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 persons so entitled, not less than 21 days before the date of the meeting.

Section 137 — Copy of Financial Statement to be Filed with Registrar

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 this Act, duly adopted at the AGM, shall be filed with the Registrar within 30 days of the date of AGM in Form AOC-4. Where the financial statements are not adopted at AGM or adjourned AGM, such unadopted financial statements shall be filed within 30 days of the date of AGM. If a company fails to file, it shall be liable to a penalty of ₹10,000 and in case of continuing failure, an additional penalty of ₹100 for each day during which such failure continues, subject to a maximum of ₹2 lakh.

Section 138 — Internal Audit

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. Rule 13 of the Companies (Accounts) Rules, 2014 prescribes internal audit for:

• Every listed company;
• Every unlisted public company having paid-up share capital of ₹50 crore or more; OR turnover of ₹200 crore or more; OR outstanding loans/borrowings from banks or public financial institutions exceeding ₹100 crore at any point of time during the preceding financial year; OR outstanding deposits of ₹25 crore or more at any point of time during the preceding financial year;
• Every private company having turnover of ₹200 crore or more; OR outstanding loans/borrowings from banks or public financial institutions exceeding ₹100 crore at any point of time during the preceding financial year.