1 Director’s Report – Disclosure Requirements Under Companies Act, 1956 on Fri 2 Apr 2010 - 15:07
Every year company directors have to prepare a report for the company’s members to explain what the company has been doing and its plans for the future. The report is typically prepared on a quarterly and annual basis. It includes detailed items such as the accountant's financial analyses and management recommendations. The report is usually unaudited. A statement by a company's directors in its annual accounts giving the directors' opinion of the state of the company, and how much should be paid to people owning shares in the company. The report is intended to report, to all interested stakeholders, the directors' explanations and interpretations of the profit/loss, the state of affairs of the group and any other matters which may be material for the stakeholders' attention. Section 210 (1) of the companies act, 1956 provides that at every annual general meeting, the Board of Director’s should lay before the meeting a balance sheet and profit and loss account for the financial year.
Disclosures in the Board’s Report
[A] Information required to be given In the Board’s report:
The following are the information’s required to be given in the Board’s report:
State of affairs of the company
Amounts, if any, they proposed to carry to reserves in the balance sheet.
The amount, if any, which they recommend should be paid by way of dividend.
Material changes and commitments, if, any affecting the financial position of the company which have incurred between the end of financial year and the date of report.
Particulars as to the conservation of energy, technology, absorption, foreign exchange earnings and outgo in such a manner as may be prescribed in companies (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988.
[B] Changes to be mentioned in the Board’s Report: [217(2)]
The Board’s report should disclose the following changes, which have occurred during the financial year:
Changes in the class of business in which the company has an interest.
Changes in the nature of the company’s business.
Change in the company’s subsidiaries or in the nature of business carried by them.
[C] Particulars about certain employees: [217(2A]
Director’s report should contain the details of the following employees:
Every employee whose remuneration is more than 24 lacks per annum for the financial year or more than 2 lacks per month, if employed for a part of the year.
If any employee holds 2% or more of the equity shares by himself or along with his spouse and dependent children and his remuneration is more than that of managing director or whole-time director or in case of a company managed by a manager the name of such employee should be included in the statement.
Companies (Particulars of Employees) Rules, 1975 prescribes the following particulars to be included in the statement:
Designation of the employee.
Nature of Employment (Contractual or otherwise)
Qualification and experience.
Date of the commencement of the employment.
The age of the employee.
The last employment held before joining the company.
The percentage of equity share held by the employee in the company within the manner of sec. 217(2A)(a)(iii)
[D] Director’s Responsibility Statement: [217(2AA)]
The Board's report shall also include a Directors' Responsibility, Statement, indicating therein,-
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 at the end of the financial year and of the profit or loss of the company for that period;
that the directors had 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;
that the directors had prepared the annual accounts on a going concern basis.
[E] Delay in Completion of buy-back: [77A]
Director’s report should specify the reasons for the failure to complete buy-back within 12 months from the date of passing the buy- back resolution.
[F] Composition of audit committee: [292A and clause 49]
According to section 292A of the companies act, 1956 the board report shall mention the composition of audit committee. Thus all companies having a capital of not less than 5 cr. should in the boards report the name of the members and chairman of the committee. If the company is listed company and listing agreement is applicable then such company should meet the requirements of clause 49 of the listing agreement.
According to the SEBI (ESOS/ESOPs) Guidelines, 1999 the board shall make disclosure in it’s report with regard to ESOS and RSOP in accoedance with the guidance no. 12 and 19 respectively.
[H] Sweat Equity:
In an unlisted company the Board is required to disclose in its report the details of issue of sweat equity shares as per rule 7 of unlisted companies (Issue of Sweat Equity Shares) Rules, 2003.
[I] Preferential allotment:
If a company fails to make preferential allotment within 12 months from the date of passing the special resolution by the shareholders, a disclosure with reasons for failure shall be made in the Board’s report.
[J] Redemption of Shares/ Debentures:
If any redemption of shares / debentures during the financial year was due but has not been made, the reason thereof shall be disclosed in the Director’s report.
[K] Shareholder’s Resolution:
If any resolutions which were passed by the shareholders in the previous meetings but no action has been taken thereupon, the reason thereof shall be disclosed in the report.
[L] Change in the composition of the Board:
Any appointment, reappointment, change in the office of the director whether by virtue of rotation, resignation, death or otherwise, of any director should be indicated in the Director’s report.
[M] Disqualification of Director:
The board should disclose the disqualification, if any, due to non-compliance of the any provision of the act. This is a good corporate governance practice to disclose such information. The act or non-compliance, due to which a director is disqualified, should also be disclosed.
[N] Investor Education and Protection Fund:
It is a good corporate governance practice that the board report shows the amount, if any, transferred to IEPF established under section 205C of the companies’ act 1956.
[O] Secretarial Compliance Certificate:
According to section 383A (1) the companies act 1956 every company not required to have a whole time company secretary having a paid up capital of Rs ten lacks or more must attach with the board’s report a compliance certificate from a Company Secretary in whole time practice as to whether the provisions have been complied with or not.