Accounts of Companies
Section 128. Books of Account to be Kept by the Company.
128(1).
Every company must prepare and maintain proper books of account, along with all relevant records and financial statements, for each financial year at its registered office.
These books must:
Present a true and fair view of the company’s overall affairs, including those of its branch offices, if any.
Be maintained on the accrual basis and according to the double-entry system of accounting.
The Board of Directors may decide to keep the books at another place in India, but the company must inform the Registrar of Companies within seven days, giving the complete address of that place.
The company may also maintain its books and records in electronic form, as per the prescribed rules.
128(2).
If a company has a branch office (in India or abroad), it will be considered compliant if:
The branch maintains proper books of account for its transactions.
Summarised returns of those transactions are sent periodically to the company’s registered office or to the other approved location where the main books are kept.
128(3).
All books and records kept in India must be open for inspection by any director during business hours.
The books and record should be kept either at the registered office or the other approved place.
If any financial information is maintained outside India, the company must keep copies of such data in India so that they can be inspected.
In the case of a subsidiary company, its records may be inspected only by a person authorised through a Board resolution.
128(4).
During such inspection, company officers and employees are legally bound to cooperate and assist the inspecting person, providing all necessary support.
128(5).
Every company must preserve its books of account for at least eight financial years immediately preceding the current one.
If the company has been incorporated for less than eight years, it must preserve all its existing records.
If an investigation is ordered under Chapter XIV, the Central Government may direct the company to preserve the books for a longer period.
128(6).
If the Managing Director, Whole-time Director (Finance), Chief Financial Officer (CFO), or any other person responsible for compliance fails to adhere to these provisions, they shall be punishable with a fine ranging from ₹50,000 to ₹5,00,000.
Section 129. Financial Statement.
129(1).
Every company must prepare financial statements that:
Present a true and fair view of the state of affairs of the company.
Comply with the accounting standards notified under Section 133.
Be in the form(s) prescribed in Schedule III, based on the type and class of company.
The items in the financial statements must be in accordance with the accounting standards.
This requirement does not apply to certain classes of companies such as:
Insurance companies.
Banking companies.
Electricity generation/supply companies.
Any other company for which a specific format of financial statements is prescribed under another law.
A financial statement shall not be treated as misleading or incomplete merely because it does not disclose information.
Provided that the disclosed information is not required by the governing law applicable to that company.
Specifically:
(a) For insurance companies: Non-disclosure of matters not required under the Insurance Act, 1938 or IRDA Act, 1999 will not affect fairness.
(b) For banking companies: Non-disclosure of matters not required under the Banking Regulation Act, 1949 is permitted.
(c) For electricity companies: Non-disclosure of matters not required under the Electricity Act, 2003 is acceptable.
(d) For any other company governed by another law, omission of matters not required by that law is also acceptable.
129(2).
At every Annual General Meeting (AGM), the Board of Directors must lay before the members the financial statements for that financial year.
129(3).
If a company has one or more subsidiaries or associate companies, it must also prepare a consolidated financial statement (CFS):
In the same form and manner as its own financial statement,
In accordance with the applicable accounting standards.
This consolidated statement must be laid before the AGM along with the company’s standalone financial statement.
A separate statement must be attached, showing the salient features of the financial statements of each subsidiary and associate company.
This statement has to be attached in the prescribed form.
The Central Government may specify how consolidation of accounts is to be carried out for certain companies.
129(4).
All provisions of this Act relating to the preparation, adoption, and audit of a company’s financial statements will apply mutatis mutandis to consolidated financial statements as well.
129(5).
If a company’s financial statements do not comply with the prescribed accounting standards, the company must:
Disclose the nature of deviation.
Provide reasons for such deviation.
Show the financial effect resulting from the deviation.
129(6).
The Central Government may, by notification:
Exempt any class or classes of companies from any requirements of this section or the rules made under it,
Either unconditionally or subject to specific conditions,
If such exemption is deemed necessary in the public interest.
129(7).
If a company fails to comply with this section:
The Managing Director, Whole-time Director (Finance), Chief Financial Officer (CFO), or any other person responsible under the Board’s direction shall be punishable with:
Imprisonment up to one year.
Fine between ₹50,000 and ₹5,00,000.
Both.
If none of these officers are present, all directors of the company will be liable.
Explanation
For this section, the term Financial statement includes:
The main statements (Balance Sheet, Profit & Loss, etc.).
Notes and annexures forming part of the financial statements, which contain details and disclosures required or permitted under this Act.
Section 129A. Periodical financial results.
129A(a).
The Central Government may require certain classes of unlisted companies, as may be prescribed, to:
Prepare financial results of the company on a periodic basis.
In such form and manner as may be prescribed by rules.
129A(b).
These financial results must:
Be approved by the Board of Directors, and
Undergo either a complete audit or a limited review,
In accordance with the procedure and standards prescribed.
129A(c).
After completion of each relevant period, the company must:
File a copy of these periodical financial results with the Registrar of Companies (ROC),
Within 30 days of the end of that period, and
Pay such prescribed fees along with the filing.
Section 130. Re-opening of accounts on the court’s or Tribunal’s orders.
130(1).
A company cannot re-open its books of account or recast its financial statements on its own.
Re-opening is allowed only if:
An application is made by the Central Government, Income Tax authorities, SEBI, any other statutory regulatory body, or any person concerned; and
A court of competent jurisdiction or the Tribunal issues an order permitting such re-opening.
Grounds for Re-opening
The court or Tribunal may allow re-opening only if it is satisfied that:
The accounts were fraudulently prepared.
There was mismanagement of the company’s affairs that renders the financial statements unreliable.
These are the only two valid grounds for re-opening books of account.
Notice and Representation Requirement
Before passing any order, the court or Tribunal must give notice to:
The Central Government.
Income Tax authorities.
SEBI.
Any other concerned regulatory body.
Any person concerned.
Consider their representations or objections before making a final decision.
130(2).
Once the accounts are revised or re-cast under 130(1), the revised accounts become final.
No further changes can be made except as permitted by law.
This provides certainty and closure after the re-opening process.
130(3).
No order can be made to re-open accounts older than eight financial years preceding the current financial year.
Exception
If the Central Government has directed the company o preserve records for a longer period, re-opening may extend to that period.
The Central Government can direct the company in accordance with Section 128(5).
Section 131. Voluntary revision of financial statements or the Board’s report.
131(1).
If the directors of a company discover that:
(a). The financial statements.
(b). The Board’s report for any of the three preceding financial years do not comply with the requirements of Section 129 or Section 134.
They may after obtaining approval from the Tribunal (NCLT) prepare a revised financial statement or a revised Board’s report.
(i). The company must apply to the Tribunal in the prescribed form and manner.
(ii). Once approval is granted, a copy of the Tribunal’s order must be filed with the Registrar of Companies (ROC).
Notice to Authorities Before Approval
Before passing any order, the Tribunal shall:
(a). Give notice to the Central Government and the Income Tax authorities.
(b). Consider any representations or objections received from them.
Restrictions on Revision
A company can revise its financial statements or Board’s report only once in a financial year.
The Board’s Report of the year in which such revision is made must clearly explain the reasons for revising the earlier documents.
131(2).
If the earlier financial statements or Board’s report have already been:
(a). Sent to members or
(b). Filed with the Registrar or
(c). Laid before the general meeting, then the company’s revision shall be limited to:
Making corrections necessary to comply with Section 129 or Section 134.
Making only consequential changes resulting from such corrections.
131(3).
The Central Government may make rules regarding the manner in which the provisions of this section shall apply to revised financial statements or reports, including:
(a). Whether the earlier financial statements or reports are to be replaced or supplemented with the revised ones.
(b). The role of the company’s auditor in verifying or auditing the revised documents.
(c). The steps and responsibilities of directors to complete the revision process properly.
Section 132. Constitution of the National Financial Reporting Authority.
132(1).
The Central Government may, by notification, constitute the National Financial Reporting Authority (NFRA) to oversee matters related to accounting and auditing standards under the Companies Act.
132(1A).
NFRA shall perform its functions through various divisions, as may be prescribed.(For example, divisions for audit quality review, enforcement, and standards.)
132(2).
Notwithstanding anything contained in any other law, NFRA shall have the following duties and powers:
(a). To recommend to the Central Government policies and standards on accounting and auditing for companies or classes of companies and their auditors.
(b). To monitor and enforce compliance with these accounting and auditing standards.
(c). To oversee the quality of audit and related professional services, and to suggest measures for their improvement.
(d). To perform any other prescribed functions connected with the above purposes.
132(3).
NFRA shall consist of:
(a). A Chairperson, who is a person of eminence and expertise in accountancy, auditing, finance, or law, appointed by the Central Government.
(b). Not more than fifteen members, full-time or part-time, as may be prescribed.
The terms, conditions, and appointment procedure for the Chairperson and Members shall be prescribed by rules.
The Chairperson and Members must declare no conflict of interest or lack of independence in their appointment.
A full-time Chairperson or Member cannot be associated with any audit firm or related consultancy firm during their tenure and for two years after leaving office.
132(3A).
Each division of NFRA shall be headed by the Chairperson or a full-time Member authorised by the Chairperson.
132(3B).
An executive body, comprising the Chairperson and full-time Members, shall handle the operational functions of NFRA.
This does not include those relating to standard-setting and appellate matters.
132(4).
NFRA has quasi-judicial powers similar to those of a civil court under the Code of Civil Procedure, 1908.
Investigation Power
The National Financial Reporting Authority (NFRA) has the power to investigate cases of professional or other misconduct.
Such investigation can be started:
On its own initiative (suo motu).
On a reference made by the Central Government.
The investigation can be against:
An individual Chartered Accountant.
A firm of Chartered Accountants.
Once NFRA initiates an investigation, no other institute or body (including ICAI) can start or continue a parallel inquiry.
Civil Court Powers
NFRA may exercise powers relating to:
(i). Discovery and production of books of account and documents.
(ii). Summoning and examining persons under oath.
(iii). Inspection of books, registers, and documents at any place.
(iv). Issuing commissions for examination of witnesses or documents.
Penalties
If NFRA finds a member or firm guilty of misconduct:
It may impose the following penalties:
For individuals: Minimum ₹1 lakh, up to five times the audit fees received.
For firms: Minimum ₹5 lakh, up to ten times the audit fees received.
It may debar the member or firm from:
Acting as auditor or internal auditor.
Conducting any audit of financial statements.
Performing valuation services under Section 247, for a period between six months and ten years.
Explanation:
Professional or other misconduct means misconduct as defined in Section 22 of the Chartered Accountants Act, 1949.
132(5).
Any person aggrieved by an NFRA order may appeal to the Appellate Tribunal (NCLAT) in the prescribed manner and with the prescribed fee.
132(6)-(9). Omitted
132(10).
NFRA shall:
(a). Meet at such times and places as may be prescribed.
(b). Follow prescribed rules and procedures for conducting meetings and transacting business.
132(11).
The Central Government may appoint a Secretary and other officers and employees to assist NFRA.
Their service conditions shall be prescribed by the government.
132(12).
The head office of NFRA shall be at New Delhi, though it may hold meetings or operate from other locations in India as necessary.
132(13).
NFRA shall:
(a). Maintain books of account and records in the prescribed form.
(b). Obtain approval from the Central Government, after consultation with the Comptroller and Auditor General (CAG) of India.
132(14).
The CAG of India shall audit NFRA’s accounts at prescribed intervals.
The audited accounts and audit report shall be forwarded to the Central Government, which shall lay them before Parliament.
132(15).
NFRA shall prepare an annual report every financial year giving a complete account of its activities.
This report, along with the CAG’s audit report, shall be submitted to the Central Government, which shall then lay both reports before each House of Parliament.
Section 133. The Central Government to prescribe accounting standards.
The Central Government may prescribe accounting standards, or any addendum (addition or modification) to those standards.
These standards are to be recommended by the Institute of Chartered Accountants of India (ICAI).
ICAI is a professional body created under Section 3 of the Chartered Accountants Act, 1949.
Before finalising them, the Central Government must do this in consultation with and after examining the recommendations made by the NFRA.
This means:
ICAI prepares and suggests accounting standards.
NFRA examines those standards and gives its opinion or advice.
The Central Government finally approves and notifies them officially.
Once notified, these standards become mandatory for companies to follow.
Until the NFRA was formally established under Section 132 of the Companies Act, 2013, the Central Government could still prescribe accounting standards.
But instead of consulting NFRA, it had to consult the National Advisory Committee on Accounting Standards (NACAS).
NACAS was an earlier advisory body formed under Section 210A of the old Companies Act, 1956, and it used to perform a similar role.
Section 134. Financial statement, Board’s report.
134(1).
Every financial statement, including the consolidated one, must first be approved by the Board of Directors.
Once approved, it shall be signed on behalf of the Board by:
(i). The Chairperson of the company if authorised by the Board.
(ii). Two directors, one of whom must be the MD , along with the CEO , CFO & CS , wherever such officers are appointed.
In the case of a One Person Company (OPC), the financial statement shall be signed by the single director only.
After signing, the statement is submitted to the auditor for his report.
134(2).
Every financial statement must have the auditor’s report attached, reflecting the auditor’s opinion on the fairness and accuracy of the statements.
134(3).
Along with the financial statement, the company must present a Board’s Report at the general meeting, which shall include the following particulars:
(a). The web address of the company’s annual return under Section 92(3).
(b). The number of Board meetings held during the year.
(c). The Directors’ Responsibility Statement.
(ca). Details of frauds reported by auditors under Section 143(12), except those reportable to the Central Government.
(d). A statement from independent directors confirming their declaration under Section 149(6).
(e). For companies covered under Section 178(1), details of the policy on directors’ appointment and remuneration, including:
(i). Criteria for qualifications.
(ii). Positive attributes.
(iii). Independence of directors.
(f) Explanations or comments by the Board on:
(i). Any qualification, reservation, or adverse remark by the auditor.
(ii). Any such remark by the company secretary in the secretarial audit report.
(g). Particulars of loans, guarantees, or investments under Section 186.
(h). Details of contracts or arrangements with related parties under Section 188(1), in the prescribed form.
(i). The state of the company’s affairs.
(j). The amount proposed to be transferred to reserves.
(k). The amount recommended for dividend, if any.
(l). Any material changes and commitments affecting the financial position of the company between the year-end and the date of the report.
(m). Information on energy conservation, technology absorption, foreign exchange earnings, and outgo.
(n). A statement on risk management policy identifying risks that may threaten the company’s existence.
(o). Details of Corporate Social Responsibility (CSR) initiatives taken during the year.
(p). For listed companies and other prescribed public companies, a statement showing how the annual evaluation of the Board, its committees, and individual directors was conducted.
(q). Any other matters as may be prescribed.
If any of the above disclosures are already included in the financial statements, the report may simply refer to those disclosures instead of repeating them.
If the company’s policy on appointment/remuneration ) is available on its website, then:
It is sufficient for the Board’s Report to give a brief summary and mention the web address where the full policy can be accessed.
134(3A).
The Central Government may allow an abridged version of the Board’s Report for One Person Companies or small companies to simplify compliance.
134(4.).
For an OPC, the Board’s Report shall contain only explanations or comments on any qualification, reservation, or adverse remark made by the auditor in his report.
134(5.
This statement confirms the directors’ accountability for the company’s operations and financial reporting.
It shall state that:
(a). The applicable accounting standards have been followed, with proper explanations for any departures.
(b). Accounting policies were selected and applied consistently with reasonable and prudent judgment, giving a true and fair view of the company’s financial position and performance.
(c). Adequate accounting records have been maintained to safeguard assets and prevent fraud or irregularities.
(d). The accounts were prepared on a going concern basis.
(e). For listed companies, directors have established adequate internal financial controls which are operating effectively.
(f). Proper systems are in place to ensure legal compliance, and these systems are adequate and effective.
Explanation.
Internal financial controls means all policies and procedures ensuring:
(a). Orderly and efficient business conduct.
(b). Adherence to company policies.
(c). Safeguarding of assets.
(d). Prevention and detection of fraud and errors.
(e). Timely preparation of reliable financial information.
134(6).
(a) The Board’s Report and its annexures must be signed by:
(i). The Chairperson, if authorised by the Board.
(ii). At least two directors, one being the Managing Director.
(b) In case of a company with only one director, that director shall sign.
134(7).
Every signed financial statement, including the consolidated one, must be issued, circulated, or published along with:
Notes annexed to or forming part of the statement.
The auditor’s report.
The Board’s Report.
134(8).
If the company fails to comply with this section, it shall be liable to a penalty of ₹3,00,000.
Every officer in default shall be liable to a penalty of ₹50,000.
Section 135. Corporate Social Responsibility.
135(1).
CSR obligations apply to every company (including holding, subsidiary, and foreign companies having a branch or project office in India).
If any company meets any one of the following financial thresholds during the immediately preceding financial year:
Net worth of ₹500 crore or more.
Turnover of ₹1,000 crore or more.
Net profit of ₹5 crore or more.
Such a company shall constitute a Corporate Social Responsibility (CSR) Committee of the Board consisting of three or more directors, at least one of whom must be an independent director.
If a company is not required to appoint an independent director under Section 149(4), its CSR Committee shall consist of two or more directors.
135(2).
The composition of the CSR Committee must be disclosed in the Board’s Report prepared under Section 134(3).
135(3).
The CSR Committee shall:
Formulate and recommend to the Board a CSR Policy specifying the activities to be undertaken by the company in accordance with Schedule VII.
Recommend the amount of expenditure to be incurred on such activities.
Monitor the implementation of the CSR Policy from time to time.
135(4).
After considering the recommendations of the CSR Committee, the Board shall:
Approve the CSR Policy and disclose its contents in the Board’s Report and on the company’s website, if any, as per the prescribed rules.
Ensure that the activities included in the CSR Policy are undertaken by the company.
135(5).
Every company covered under this section shall spend, in every financial year, at least two per cent of the average net profits made during the three immediately preceding financial years (or such number of years as available in case of a newly incorporated company) on CSR activities in accordance with its CSR Policy.
The company shall give preference to the local area and areas around where it operates for CSR project implementation.
If the company fails to spend the prescribed amount:
The Board shall, in its report under Section 134(3)(o), specify the reasons for not spending.
Unless the unspent amount relates to an ongoing project, the company shall transfer the unspent amount to a Fund specified in Schedule VII within six months of the end of the financial year.
If a company spends more than the prescribed amount, it may set off such excess against future CSR obligations as may be prescribed.
Explanation.
For the purposes of CSR, “net profit” shall be calculated as per Section 198, excluding sums such as dividends received and profits from overseas branches.
135(6).
Where the unspent amount pertains to any ongoing project, the company shall:
Transfer the unspent amount to a special account called the “Unspent Corporate Social Responsibility Account” within 30 days from the end of the financial year.
Spend the amount from this account on CSR projects within three financial years from the date of such transfer.
If the amount remains unspent after the said three years, it shall be transferred to a Fund specified in Schedule VII within 30 days from the end of the third financial year.
135(7).
If a company fails to comply with the provisions of 135(6) & 135(7):
The company shall be liable to a penalty of twice the amount required to be transferred, or ₹1 crore, whichever is less.
Every officer in default shall be liable to a penalty of one-tenth of the amount required to be transferred, or ₹2 lakh, whichever is less.
135(8).
The Central Government may issue general or special directions to any company or class of companies to ensure compliance with CSR provisions, and such directions shall be binding.
135(9).
If the total CSR amount to be spent by a company does not exceed ₹50 lakh in a financial year, the company is not required to constitute a CSR Committee.
In such cases, all functions of the CSR Committee shall be discharged by the Board of Directors itself.
Section 136. Right of member to copies of audited financial statement.
136(1).
Every company shall send a copy of:
Its financial statements (including consolidated financial statements, if any
The auditor’s report
Every other document required by law to be attached to such statements, to the following persons:
Every member (shareholder) of the company.
Every trustee for debenture holders.
Every other person entitled to receive the same, at least 21 days before the date of the general meeting where these documents will be laid before the company.
If the documents are sent less than 21 days before the meeting, it shall still be valid if consent is given by":
Members holding at least 95% of the voting capital (for companies having share capital), or
Members holding 95% of the total voting power (for companies not having share capital).
Special Provisions for Listed Companies:
It shall be sufficient compliance if:
The financial documents are kept available for inspection at the registered office of the company during working hours for at least 21 days before the meeting
A statement containing the salient features of such documents or copies thereof are sent to every member and trustee for debenture holders.
If any member requests a full copy of the financial statements, the company shall provide it.
Additional Requirements:
The Central Government may specify particular methods for circulating financial statements for certain classes of companies.
Every listed company must comply with the following requirements:
It must place its financial statements, including consolidated financial statements and all other related documents, on its official website.
If the company has subsidiaries:
(A) It must upload the separate audited accounts of each subsidiary company on its website.
(B) In the case of a foreign subsidiary:
If the laws of that country require the preparation of consolidated financial statements, those consolidated accounts may be placed on the parent company’s website.
If not, the company must upload the unaudited financial statements of the foreign subsidiary, along with an English translation if the original statements are in another language.
136(2).
Every member and every trustee for debenture holders shall have the right to inspect the financial statements and other attached documents at the company’s registered office during business hours.
In the case of companies having subsidiaries, any member of the company shall be entitled to receive copies of the audited or unaudited financial statements of the subsidiary, upon request.
136(3).
If any company fails to comply with the provisions of this section:
(a). The company shall be liable to a penalty of ₹25,000.
(b). Every officer of the company who is in default shall be liable to a penalty of ₹5,000.
Section 137. Copy of financial statement to be filed with Registrar.
137(1).
Every company shall file with the Registrar of Companies (ROC):
(a).
A copy of its financial statements, including consolidated financial statements, if any.
(b).
All other documents required to be attached under this Act, such as the auditor’s report and the Board’s report, within 30 days from the date of AGM.
It has to be attached along with the prescribed filing fees or additional fees in case of delay.
If the financial statements are not approved at the AGM or any adjourned AGM, the company shall:
Still file the unadopted financial statements and required documents with the Registrar within 30 days of the AGM.
Such statements shall be treated as provisional until the adopted financial statements are filed after the adjourned AGM.
Once the statements are duly adopted at the adjourned meeting, they shall again be filed with the Registrar within 30 days from that date.
One Person Company:
An OPC, which is not required to hold an AGM, shall file a copy of its financial statements, duly approved by its sole member.
This has to be done within 180 days from the end of the financial year.
Companies with Foreign Subsidiaries:
Where a company has a subsidiary or subsidiaries incorporated outside India &
Such subsidiaries do not have a place of business in India, then:
The company shall attach to its own financial statements the accounts of such subsidiaries while filing with the Registrar.
When the Foreign Subsidiary Has Unaudited Accounts:
If a foreign subsidiary is not legally required under the laws of its home country to get its accounts audited, and
The subsidiary has not voluntarily conducted an audit, then:
The Indian holding company is permitted to file the subsidiary’s unaudited financial statements.
A declaration must be attached stating that the subsidiary’s accounts are unaudited.
If the statements are in a foreign language, an English translation must also be attached.
137(2).
If a company fails to hold its Annual General Meeting, it must still:
(a). File its financial statements, duly signed.
(b). Attach all required documents.
(c). Include a statement of facts and reasons explaining why the AGM was not held.
Within 30 days from the last date on which the AGM should have been held, along with the prescribed fees or additional fees, if applicable.
137(3).
If a company fails to file its financial statements within the prescribed period:
(a) For the company:
Penalty of ₹10,000.
Further penalty of ₹100 for each day during which the failure continues.
This is subject to a maximum of ₹2,00,000.
(b) For every officer in default (such as the Managing Director, CFO, or any responsible director):
Penalty of ₹10,000.
Further penalty of ₹100 for each day after the first day of default.
This is subject to a maximum of ₹50,000.
Section 138. Internal Audit.
138(1).
Certain classes of companies, as may be prescribed by the Central Government through rules, must appoint an Internal Auditor.
The Internal Auditor can be:
A Chartered Accountant (CA).
A Cost Accountant.
Any other professional as the company’s Board of Directors may decide, to conduct an internal audit of the functions and activities of the company.
138(2).
The Central Government has the power to make rules that will specify:
How (the manner in which) the internal audit should be carried out, and
When (the intervals or frequency) the audit report should be submitted to the Board of Directors.
