Compliance Checklist for Preparation of Board’s Report for Small Company & OPC

Introduction

The Board’s report is a communication by the Board of Directors of the company to its shareholders. Generally, the Board of Directors communicate about the company’s financial performance in the reporting period, impact of economic policies on the company and industry. Generally, the directors, in the report, also share their perspective and vision for the next financial year. Section 134 of the Companies Act, 2013 (“the Act”) relates to “Financial Statements and Board’s report, etc.”. The provisions lay down minimum disclosures by the companies in the Board’s report. Rules 8 and 8-A of the Companies (Accounts) Rules, 2014 also provide for certain disclosures in the Board’s report. This article is checklist for preparation of Board’s report for small company & One-person company (OPC).

1. Meaning of Small Company.— Pursuant to Section 2(85) of the Act, “small company” means a private company having paid-up share capital of which does not exceed Rs 50 lakhs[1]; and turnover of which as per P&L A/c for the immediately preceding financial year does not exceed Rs 2 crores[2]. However, small company shall not include holding company, subsidiary company, company registered under Section 8 of the Act or a company or body corporate governed by any special Act.

2. Meaning of One Person Company (OPC).—OPC means a company which has only one person as a member. OPC shall have minimum 1 director and can have maximum of 15 directors. Only a natural person who is an Indian citizen and resident in India shall be eligible to incorporate OPC and shall be a nominee for the sole member of an OPC. A natural person shall not be member of more than one OPC at any point of time and the said person shall not be a nominee of more than one OPC.

3. Applicability of Relevant Provisions.—Taking into consideration the limited operations and volume of small company and OPC, Ministry of Corporate Affairs (MCA) has prescribed limited disclosures for such companies. Rule 8-A, Companies (Accounts) Rules, 2014[3] relates to such disclosures. However, such companies shall also comply with the relevant provisions of Section 134 of the Act.

4. Disclosures by Small Company & OPC.—The Board’s report of OPC and small company shall be prepared based on the standalone financial statement of the company, which shall be in abridged form. The Board’s report shall contain the following disclosures:

(a) State of the Company’s Affairs.—In this clause, the directors may explain the performance and operations of the company in the financial year. They can also provide comparative statistics of the company’s performance with earlier financial year. In the Board’s report prepared for the financial year 2019-2020, it is desirable that directors discuss the impact of Covid-19 and lockdown on company’s operations and some guidance for the financial year 2020-2021.

(b) Financial Summary or Highlights.—Generally, there is a mention of the total sales, net profit (before tax and after tax), declaration of dividend, transfer to general reserves and some important developments in the company. At the time of preparation of the report, it is necessary to refer the financial statements are prepared and audited by the auditors of the company.

(c) Details of Directors who were Appointed or have Resigned during the year.—For including the same in the Board’s report, it is necessary to refer and rely upon the minutes of Board meeting, minutes of general meeting, e-forms filed with the MCA and register of directors and key managerial personnel. It is also necessary to confirm the date of appointment or resignation with the documents submitted or necessary disclosures made by the directors. The company may also mention the vacation of office of director, disqualification, etc. Ensure that the Board is duly constituted after such change i.e. requisite number of directors, resident director, women director, independent director (depending upon the applicability). Due to the change in directors, ensure the committees (if any) are also reconstituted. If there is no such appointment or resignation, it is necessary to disclose the same.

(d) Number of Meetings of the Board.—For including the same in the Board’s report, it is necessary to refer and rely upon the notice, attendance sheet of the minutes of Board Meeting. It is necessary to mention only number of meetings, however, some companies may prefer to disclose the dates of meeting and other details.

(e) Director’s Responsibility Statement.—The Board’s report shall include the following statements:

(i) In the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures – Confirm with the financial statements of the company and also refer the audit report of the company.

(ii) 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 and loss of the company for that period-Confirm with the financial statements of the company and also refer the audit report of the company.

(iii) 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 – Confirm with the financial statements of the company and also refer the audit report of the company.

(iv) The directors had prepared the annual accounts on a going concern basis – Confirm with the financial statements of the company and also refer the audit report of the company. This is a very important point in the present Covid-19 and lockdown situation as operations of many sectors, companies is affected.

(v) 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 – Confirm with the representative of the company and also check the system adopted by the company for ensuring compliance with the provisions of all application laws.

(f) Details in Respect of Frauds Reported by Auditors (other than those which are reportable to the Central Government).—In order to confirm the same and include necessary information in the Board’s report, check the auditors report, communication between the company and auditor and minutes of Board meetings. If there is no such event, it is necessary to disclose the same.

(g) Explanations or Comments by the Board on Every Qualification, Reservation or Adverse Remark or Disclaimer made by the Auditor in his Report.—In order to confirm the same and include necessary information in the Board’s report, check the auditors report for any qualification, reservation, adverse remark or disclaimer. It is necessary that the directors explain/reply/comment on such remark in the Board’s report. It is desirable that the directors also explain the steps taken to rectify the particular default or non-compliance. If there is no such remark or comment, it is necessary to disclose the same.

(h) Material Changes from the Date of Closure of the Financial Year in the Nature of Business and their Effect on the Financial Position of the Company.—For this year, this clause will be very important in the Board’s report as it will cover material changes and impact of lockdown on the company from 31-3-2020 till the financial statements of the company are finalised and signed. Considering the fact that the lockdown and Covid-19 has affected every person and every business, such disclosure in the Board’s report for 31-3-2020 is mandatory.

(i) Details or Significant and Material Orders Passed by the Regulators or Courts or Tribunals Impacting the Going Concern Status and Company’s Operations in Future: In order to confirm the same and include necessary information in the Board’s report, it is necessary to confirm the same with the management and also refer to the minutes of the Board meeting. The notes/explanation to financial statements may also disclose such information. If there is no such event, it is necessary to disclose the same in the Board’s report.

(j) Web Address, if any, where Annual Return has been Placed.—The Board’s report shall mention the web address, if any, where annual return has been placed.

(k) Particulars of Contracts or Arrangements with Related Parties under Section 188 in the Form AOC-2.—In this clause, it is necessary to mention the following points:

(i) Details of contracts or arrangements or transactions not at arm’s length basis.

(ii) Details of contracts or arrangements or transactions at arm’s length basis.

       The disclosures are made in Form AOC-2 and the same shall be signed by the persons who have signed the Board’s report.

(l) Any other Disclosures.—The directors may make any other disclosures in the Board’s report.

5. Approval of Financial Statements.—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 by the Chairperson of the company (where he is authorised by the Board) or by 2 directors (out of which one shall be managing director, if any), and the CEO, the CFO and the CS of the company, wherever they are appointed. In the case of OPC, only by one director. After the approval by the Board of Directors, the financial statements shall be submitted to the auditor for his report thereon. The audit report shall be attached to the financial statements. Ensure that the necessary approval and authority is given in the meeting of the Board of Directors and the same is recorded in the minutes of meeting. Till 30-9-2020, MCA has allowed companies to conduct Board meetings through videoconferencing or other audio-visual means for approval of annual financial statements, approval of Board’s report, etc.

6.  Signing of Board’s Report.—The Board’s report and any annexures thereto shall be signed by its Chairperson of the company (if he is authorised by the Board of Directors). Where the Chairperson is not so authorised, the same shall be signed by at least 2 directors, one of whom shall be Managing Director, or by the director where there is one director. Ensure that the necessary authority is given in the meeting of the Board of Directors and the same is recorded in the minutes of meeting.

7. Circulation/Publishing of Financial Statements and Board’s Report.—A signed copy of every financial statement shall be issued, circulated or published along with a copy each of any notes annexed to or forming part of such financial statement, auditor’s report; and the Board’s report.


Gaurav N Pingle, Practising Company Secretary, Pune. He can be reached at gp@csgauravpingle.com.

[1] Or such higher amount as may be prescribed which shall not be more than Rs 10 crores.

[2] Or such higher amount as may be prescribed which shall not be more than Rs 100 crores.

[3] Inserted by the Companies (Accounts) Amendment Rules, 2018, w.e.f. 31-7-2018.

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