Approval of Financial Statements:
Who Approves: The Board of Directors (BoD) must approve the Financial Statements (FS), including the Consolidated Financial Statements (CFS).
Example: The Board of Directors, led by the Chairperson, or two directors (one of them being the Managing Director), need to approve the financial statements.
Before Submission: The CEO, CFO, and Company Secretary (CS) must review and approve the FS before it goes to the auditor for their report.
Example: Before giving it to the auditor, the CEO, CFO, and CS need to ensure everything in the financial statements is correct.
One Person Company (OPC): In the case of an OPC, only one director's signature is required.
Example: If it's a one-person company, only that one person (director) needs to sign the financial statements.
Auditor's Report:
Attachment: The Auditor's report must be attached to every Financial Statement.
Example: The report from the external auditor, who reviews and verifies the financial statements, should be included.
Board's Report in General Meeting (GM):
What's Included: A Board's report needs to be attached to the Financial Statements during the General Meeting, covering various aspects.
Example: The Board's report should include details like the company's web address where Annual Returns under section 92 are available, information on loans and investments, number of board meetings held, etc.
Director's Responsibility Statement (DRS): Directors must confirm certain things in this statement.
Example: Directors need to confirm that they followed the accounting standards, selected appropriate accounting policies, and provided a true and fair view of the company's financial health.
Specific Disclosures in Board's Report:
Various Disclosures: The Board's report should cover a range of disclosures, from fraud reported by auditors to CSR initiatives.
Example: It should explain any significant changes in the company's financial position, detail policies related to director appointments, and provide information on fraud reported by auditors.
Simplifications and Compliance:
Sufficient Compliance: If certain details are already in the Financial Statements, the Board's report can refer to them instead of repeating.
Example: If the Financial Statements already mention a policy, the Board's report can simply point to that instead of restating it.
Online Policies: If company policies are available on the website, the Board's report can provide a brief overview with a web address for more details.
Example: Instead of repeating everything, the Board's report might briefly describe a policy and direct readers to the company's website for the complete details.
One-Person Company (OPC) Specifics:
OPC Board's Report: For an OPC, the Board's report means a report explaining or commenting on any issues raised by the auditor.
Example: In an OPC, the Board's report should address and explain any concerns or remarks made by the auditor in their report.
Director's Responsibility Statement (DRS) Details:
What it Should State: The DRS should confirm following accounting standards, consistent application of accounting policies, and making reasonable and prudent judgments.
Example: Directors need to confirm that they followed accounting standards, applied consistent policies, and made reasonable decisions for an accurate representation of the company's financial state.
This section emphasizes transparency, accuracy, and compliance in financial reporting and disclosures.
Director's Responsibilities:
Maintaining Records:
Directors must ensure there are proper and sufficient accounting records according to the law.
Example: Directors need to make sure the company keeps good records of its financial transactions as required by the law.
Safeguarding Assets:
Directors are responsible for protecting the company's assets and preventing fraud.
Example: Directors should put measures in place to secure the company's assets and prevent any fraudulent activities.
Going Concern Basis:
Directors need to prepare annual accounts with the assumption that the company will continue its operations.
Example: When preparing financial statements, directors should assume that the company will continue to operate in the foreseeable future (निकट भविष्य).
Internal Financial Controls (IFC):
For listed companies, directors must establish and ensure the effectiveness of internal financial controls.
Example: Directors of a listed company should have systems in place to control and monitor the company's financial activities to ensure accuracy and prevent fraud.
Explanation of IFC: Internal Financial Controls (IFC) are policies and procedures that companies adopt to ensure smooth business operations, adherence to policies, asset protection, fraud prevention, accurate accounting records, and timely financial information.
Legal Compliance Systems:
Directors must create systems to ensure the company complies with all applicable laws.
Example: Directors need to establish processes to ensure the company follows all laws relevant to its operations.
Signing of Board's Report:
Who Signs:
The Board's report should be signed by the Chairman if authorized, or else by two directors, one of whom is the Managing Director. If there's only one director (e.g., in an OPC), that director signs.
Example: The Chairman or two directors, including the Managing Director, should sign the Board's report.
Distribution of Financial Statements:
Issuing FS Copy:
A signed copy of Financial Statements, including Consolidated Financial Statements (if any), must be shared with relevant documents.
Example: The company needs to share a signed copy of its financial statements along with the auditor's report and the Board's report.
Penalties for Non-Compliance:
Penalties:
If the company doesn't comply with these requirements, it could face penalties.
Example: Failure to follow these rules may result in a penalty of Rs. 3 lakhs for the company and Rs. 50,000 for officers in default.
Matters to be Included in Board's Report:
Preparation Based on Standalone FS:
The Board's report should be based on the company's standalone financial statements and should highlight the performance of subsidiaries, associates, and joint ventures.
Example: The Board's report needs to focus on the main company's performance and how subsidiaries, associates, and joint ventures contribute to that performance.
Additional Information:
The Board's report should include details such as financial summaries, changes in the nature of business, details of directors or key management personnel changes, etc.
Example: The report should highlight key financial points, mention any changes in business activities, and list new directors or those who have resigned during the year.
Details on Compliance and Operations:
The Board's report should cover various details including compliance with deposit regulations, significant orders from regulators/courts, internal financial controls, and compliance with the Sexual Harassment related Act.
Example: The report should disclose whether the company complied with deposit regulations, any significant legal orders affecting future operations, and details on the company's internal financial controls.
Information on IBC and Valuation:
The Board's report should include details on any applications or proceedings under the Insolvency and Bankruptcy Code (IBC) during the year, as well as differences in valuations during settlements and loans.
Example: The report should inform shareholders about any legal proceedings under the IBC and explain any differences in valuations made during settlements and loans.
In summary, this section outlines the directors' responsibilities, how to sign reports, distribute financial statements, potential penalties for non-compliance, and what specific details should be included in the Board's report.
Section 137: Filing of Financial Statements with RoC
In summary, Section 137 deals with the filing of financial statements, specifying deadlines and scenarios for filing with RoC,
while Section 138 mandates certain companies to appoint an internal auditor for internal audit purposes. Non-compliance with these sections may lead to penalties.
Filing Deadline:
Financial Statements (FS), including Consolidated Financial Statements (CFS), duly adopted at the Annual General Meeting (AGM), should be filed with the Registrar of Companies (RoC) within 30 days of the AGM.
Example: If the AGM is held on September 1st, the company must submit the FS and CFS to RoC by September 30th.
Provisional Filing in Certain Cases:
If the FS are not adopted in the AGM or adjourned (स्थगित) AGM, the unadopted FS should be filed with RoC within 30 days of the AGM. RoC will consider these as provisional until the FS are filed after adoption in the adjourned AGM.
Example: If the AGM doesn't finalize the FS, the company submits the unadopted FS, and RoC notes them provisionally.
Other Scenarios:
In case of an OPC (One Person Company), the FS duly adopted by its member should be filed within 180 days from the closure of the financial year.
Example: An OPC has until March 31st of the following year to file its FS.
Foreign subsidiaries not having audited FS should send unaudited FS to RoC.
Example: A foreign subsidiary operating in India can send unaudited FS if it's not legally required to have audited FS.
If AGM is not held, FS documents duly signed should be filed with RoC within 30 days of the last date before which the AGM should have been held.
Example: If the company fails to convene an AGM, it must submit the FS documents to RoC within 30 days of the expected AGM date.
Penalties for Non-Compliance:
Failure to file FS within the specified time can lead to penalties. The company may be liable to a penalty of Rs. 10,000, and individuals responsible, including the MD and CFO, may face penalties of Rs. 100 per day up to a maximum of Rs. 2 lakhs.
Example: If the company fails to submit FS on time, it could be fined Rs. 10,000, and responsible individuals could face additional penalties.
Additional Points:
Certain classes of companies, especially those listed or meeting specific turnover criteria, should file FS in e-form AOC-4 XBRL.
Example: Listed companies and those with a turnover exceeding specified limits need to file FS in XBRL format.
Section 138: Internal Audit
Appointment of Internal Auditor:
Certain classes of companies, including listed companies, unlisted public companies with turnover and loans exceeding specified limits, and private companies with substantial loans or deposits, are required to appoint an internal auditor.
Example: A listed company and an unlisted public company with a turnover of Rs. 200 crores or outstanding loans exceeding Rs. 100 crores must appoint an internal auditor.
Internal Auditor's Role:
The internal auditor, who can be an individual, partnership firm, or body corporate and may be a Chartered Accountant or Cost Accountant, conducts internal audits of the company's functions and activities.
Example: The internal auditor reviews and assesses the company's internal processes and activities to ensure compliance and efficiency.
Role Clarity:
An internal auditor may or may not be an employee of the company.
Example: The internal auditor can be an external professional hired specifically for internal audit purposes.
Concept Clarity Check:
If an unlisted company has an outstanding loan of exactly Rs. 100 crore, it won't be subject to the internal auditor requirement because the law specifies loans exceeding Rs. 100 crores. So, in this case, the exact amount of Rs. 100 crore wouldn't trigger the provision.
Example: If an unlisted company's outstanding loans are exactly Rs. 100 crore, it doesn't fall under the internal auditor requirement.
Corporate Social Responsibility (CSR) Committee:
Mandatory Formation:
- Every company with a
- net worth of Rs. 500 crores or more,
- turnover (sales) of Rs. 1,000 crores or more,
- or a net profit of Rs. 5 crores or more
- in the preceding financial year
- must have a CSR Committee consisting of
at least three directors, including one independent director.
Example: A company with a turnover of Rs. 1,200 crores needs to form a CSR Committee with at least three directors, one of whom should be independent.
Exemptions and Composition:
If the company is not required to appoint an Independent Director, the CSR Committee can have two or more directors. Private companies with only two directors can form a CSR Committee with those two directors.
Example: A private company with two directors and a net profit of Rs. 6 crores needs to constitute a CSR Committee with its two directors.
Exemption Criteria:
If the specified financial thresholds are not met for three consecutive financial years, the company is not required to comply with Section 135. However, if the CSR spending is less than Rs. 50 lakhs, the CSR Committee is not applicable, and the Board of Directors will handle CSR functions.
Example: If a company's net profit is below Rs. 5 crores for three consecutive years, it doesn't need to follow CSR rules. If the CSR spending is less than Rs. 50 lakhs, the Board handles CSR functions.
CSR Committee Functions:
In summary, this section outlines the requirements for forming a CSR Committee, the functions of the committee, the role of the Board, minimum spending obligations, rules for unspent amounts, and penalties for non-compliance.
Responsibilities of CSR Committee:
The CSR Committee's functions - include formulating and recommending the CSR policy, suggesting the amount to be spent, and monitoring the CSR policy's implementation.
Example: The CSR Committee needs to propose a plan for CSR activities, suggest the budget, and oversee that the company follows the CSR policy.
Board's Role:
Board's Approval:
The Board, after considering the CSR Committee's recommendations, must approve the CSR policy and disclose its contents in the Board's report and on the company's website.
Example: The Board approves the CSR policy and shares the details in the annual report and on the company's website.
Minimum Spending Requirement:
The Board needs to ensure that the company spends at least 2% of the average net profits made in the three immediately preceding financial years on CSR activities. The company should give preference to the local area where it operates.
Example: If the average net profit for the last three years is Rs. 10 crores, the company needs to spend at least Rs. 20 lakhs on CSR activities.
Unspent Amount and Excess Spending:
If the company fails to spend the required amount, the Board must specify the reasons. Unspent amounts, unless related to ongoing projects, should be transferred to a specified fund within six months.
Example: If a company doesn't spend the required CSR amount, it needs to explain why. Any excess spending can be set off against future CSR requirements, subject to certain rules.
Ongoing Projects and Penalties:
Transfer of Unspent Amount:
Unspent amounts from ongoing projects must be transferred to a special account within 30 days from the end of the financial year.
Example: If there's money left from a CSR project, it needs to be moved to a special account for future CSR use within 30 days.
Penalties for Defaults:
Penalties apply for non-compliance with CSR spending and reporting. The company and officers in default could face penalties based on the unspent amount or the required transfer to the fund.
Example: If a company doesn't transfer the required amount to the fund, it may face a penalty of
up to twice the unspent amount, or Rs. 1 crore, whichever is lower. - for company
Officers in default could face penalties of up to one-tenth of the unspent amount or Rs. 2 lakhs, whichever is lower. - for Officer In Default
Corporate Social Responsibility Policy) Rules, 2014
Certainly! Let's break down the key points in Rule 2 and Rule 4 of the Companies (Corporate Social Responsibility Policy) Rules, 2014 in simpler language:
Rule 2: Definitions
CSR (Corporate Social Responsibility):
In summary, these rules define what counts as CSR activities, exceptions for certain activities, methods of implementation, registration requirements, engagement with international entities, collaboration with other companies, verification and certification of fund utilization, and monitoring ongoing projects.
These rules provide a framework for companies to fulfill their CSR obligations in a meaningful and accountable manner.
CSR means activities a company does as a legal obligation under Section 135, but it doesn't include certain things like Sponsorship, Political contributions, Employee benefits, Laws, and Foreign Business, unless they are normal business activities.
Example: If a company contributes money directly to a political party or spends on activities solely for marketing benefits, it doesn't count as CSR.
Exception for R&D in Response to COVID-19:
Companies engaged in research and development (R&D) for new vaccines, drugs, or medical devices related to COVID-19 can consider it as CSR for FY 2020-21 to 2022-23, subject to certain conditions.
Example: A pharmaceutical company working on COVID-19 vaccines can include its research spending as part of CSR activities.
Exclusion of Certain Activities Outside India:
Any CSR activity outside India is generally not counted, except for training Indian sports personnel representing a state or UT nationally or India internationally.
Example: If a company supports sports training for Indian athletes participating internationally, it can be considered CSR.
Rule 4: CSR Implementation
Modes of Implementation:
CSR activities should be done by the company itself or through specific entities like Section 8 companies, registered public trusts, registered societies, or entities with a track record of at least 3 years in similar activities.
Example: A company can directly engage in CSR activities or collaborate with established trusts or societies.
Registration Requirement:
Entities planning to undertake CSR activities need to register themselves with the Central Government using Form CSR-1. The form needs to be digitally verified by a practicing Chartered Accountant, Company Secretary, or Cost and Management Accountant.
Example: Before starting CSR activities, an entity must register itself, and a unique CSR Registration Number will be generated.
Engagement with International Organizations:
Companies can involve international organizations for designing CSR projects, following their CSR policy, and building the capacity of their personnel for CSR.
Example: A company can seek expertise from international organizations for the design and implementation of CSR projects.
Collaboration with Other Companies:
Companies can collaborate with each other for CSR projects, and each company's CSR committee should be able to report separately on the joint project.
Example: Two companies can join forces for a CSR project, and each company's CSR committee reports on the part it contributed.
Verification and Certification:
The board must ensure that funds allocated for CSR have been used for approved purposes. The Chief Financial Officer (CFO) or the person responsible for financial management should certify this.
Example: The CFO ensures that the money allocated for a specific CSR project has been used appropriately, and they provide a certificate to that effect.
Monitoring Ongoing Projects:
For ongoing projects, the board needs to monitor their implementation concerning approved timelines and allocations. Adjustments can be made if needed to ensure smooth project implementation within the overall allowed time.
Example: If a CSR project is taking longer than initially planned, the board can modify timelines to ensure successful completion.
Rule 5 and 7: CSR Reporting
(Corporate Social Responsibility Policy) Rules, 2014:
Certainly! Let's simplify Rule 5 and Rule 7 of the Companies (Corporate Social Responsibility Policy) Rules, 2014:
In summary,
Rule 5 outlines the formation and responsibilities of the CSR Committee and the annual action plan.
Rule 7 focuses on regulating administrative overheads, managing surpluses, and providing guidelines for creating or acquiring capital assets using CSR funds.
These rules aim to ensure efficient utilization of CSR funds and effective implementation of CSR activities.
Rule 5: CSR Committee and Annual Action Plan
Formation of CSR Committee:
The CSR Committee, as part of its duties, must create an annual action plan aligned with the CSR policy.
Example: The CSR Committee needs to form a plan for the year, following the company's CSR policy.
Contents of Annual Action Plan:
The annual action plan should include:
- A list of CSR projects approved for areas specified in Schedule VII.
- The execution method of these projects.
- Details on how funds will be utilized and the project's implementation schedule.
- Mechanisms for monitoring and reporting on the projects.
- Information about any need and impact assessment for the projects.
Example: The plan outlines specific CSR projects, how they'll be carried out, the budget and schedule, how the projects will be monitored, and any assessments done.
Flexibility for Plan Alterations:
The Board can make changes to the annual action plan during the financial year based on the CSR Committee's recommendations, provided there's a reasonable justification.
Example: If circumstances change, the Board can adjust the CSR plan based on recommendations from the CSR Committee.
Rule 7: CSR Expenditure
Administrative Overheads Limit:
The Board must ensure that administrative overheads (like management and administration costs) do not exceed 5% of the total CSR expenses for the financial year.
Example: If a company spends Rs. 1 crore on CSR, the administrative overheads should not exceed Rs. 5 lakhs.
Surplus from CSR Activities:
Any surplus generated from CSR activities should not be considered a part of the company's profit. It must be reinvested in the same project, transferred to the Unspent CSR Account, or moved to a Fund specified in Schedule VII within six months of the financial year's end.
Example: If a CSR project generates extra funds beyond the planned expenses, that surplus should be reinvested in another CSR project or transferred to a specified fund.
Creation or Acquisition of Capital Asset:
CSR funds may be used for creating or acquiring a capital asset, which must be held by specific entities (like Section 8 companies, registered trusts, societies) or beneficiaries of the CSR project, such as self-help groups or public authorities.
Example: CSR funds can be invested in a long-term asset, like building a school or a healthcare facility, which will benefit the community.
Compliance Period for Capital Asset:
If CSR funds are spent on creating or acquiring a capital asset, it should comply with certain rules within 180 days (with an option to seek an additional 90 days) from the asset's creation.
Example: If a CSR-funded school building is constructed, the company needs to comply with specific rules regarding its utilization within a specified timeframe.
Rule 8: CSR Reporting
In summary, Rule 8 outlines reporting requirements for CSR activities, including impact assessments.
Section 136 ensures that members have the right to receive and inspect financial documents, with penalties for non-compliance. These rules aim to enhance transparency and accountability in corporate reporting and compliance.
Mandatory CSR Reporting:
The Board's report for any financial year must include an "Annual report on CSR."
Example: In the company's annual report, there must be a section dedicated to reporting on its Corporate Social Responsibility (CSR) activities.
CSR Reporting for Foreign Companies:
For foreign companies, the balance sheet under Section 381 of the Act should contain an annual report on CSR.
Example: If a foreign company operates in India, its financial statements should include details of CSR activities.
Impact Assessment:
Companies with an average CSR obligation of Rs. 10 crores or more in the three immediately preceding financial years must undertake an impact assessment of their CSR projects, conducted by an independent agency.
Example: If a company has a significant CSR obligation, it must evaluate the impact of its CSR projects through an independent agency.
Impact Assessment Reporting:
The results of impact assessments should be presented to the Board and attached to the annual report on CSR.
Example: The findings of the impact assessment should be shared with the company's Board and included in the CSR report.
Expenses for Impact Assessment:
Companies conducting impact assessments can include the expenses in their CSR expenditure, subject to certain limits.
Example: Costs related to evaluating the impact of CSR projects can be considered as part of the CSR spending, up to a certain percentage or a fixed amount.
Section 136: Right of Member to Copies of Audited Financial Statements
Sending Documents to Members:
Copies of financial statements (FS), consolidated financial statements (CFS), and auditor's reports must be sent to every member or trustee for debenture holders at least 21 days before the general meeting.
Example: Members should receive copies of financial statements well before the annual general meeting.
Exceptions for Listed Companies:
For listed companies, compliance with the 21-day rule is considered if documents are available for inspection at the Registered Office (RO) during working hours.
Example: Listed companies can make financial documents available for inspection at their office, but a summary must be sent to the members.
Mode of Sending Documents:
The mode of sending documents can be through electronic means (email) if members have given their consent. In certain cases, physical copies may be sent through recognized modes of delivery.
Example: Financial statements can be sent via email if members agree, and in other cases, physical copies can be sent through reliable delivery services.
Website Disclosure:
Listed companies should place their FS, including CFS, on their website. If there are subsidiaries, separate audited accounts for each subsidiary should also be on the website.
Example: Financial statements should be accessible on the company's website for public information.
Inspection of Documents:]
Members and debenture trustees have the right to inspect relevant documents at the company's Registered Office during business hours.
Example: Members can visit the company's office to review financial documents during normal business hours.
Penalties for Non-Compliance:
Failure to comply with Section 136 can lead to penalties. The company may be liable to a penalty of Rs. 25,000, and officers in default may face a penalty of Rs. 5,000.
Example: If a company does not provide the required financial documents, it may face financial penalties.