under Companies Act, 2013

Financial Statements Disclosures,
Related Party Transactions,
Auditor’s Liabilities, Dividends & CARO,
under Companies Act, 2013
CA Kamal Garg
[B. Com (H), FCA, DISA (ICAI), LLB]
Part I
Changed Face of
“Significant Financial Transactions“
under Companies Act, 2013
Cash flow statement made mandatory except for
Small Companies, OPCs and Dormant Companies
• Under section 2(40)(iii)** of the 2013 Act, Cash flow statement
shall form part of the financial statements for all
• Exception: Cash Flow Statement not mandatory for:
1. One Person Companies [Section 2(62)],
2. Small Companies [Section 2(85)], and
3. Dormant Companies [Section 455];
• Section 143(2) of the 2013 Act also requires the auditor's
report to state whether in his opinion the financial statements
give a true and fair view of the cash flow for the year
Statement of Changes in Equity
made mandatory if applicable
• According to section 2(40)(iv)** of the 2013 Act, the
financial statements shall also include:
1. a statement of changes in equity [SOCIE],
2. if applicable
Financial year to be 1st April to 31st March
subject to exceptional cases
• The definition of "financial year" in section 2(41) of
the 2013 Act requires companies to adopt 1st
April to 31st March as financial year except in
certain circumstances;
• A company or a body corporate existing as at
the commencement of the 2013 Act shall within
2 years align its financial year as above from
such commencement
Financial year to be 1st April to 31st March
subject to exceptional cases…..contd.
• Exception: where company incorporated on or after the
1st January of a financial year:
1. Where a company or a body corporate has been
incorporated on or after the 1st day of January of a year:
 the (first) financial year is the period ending on the 31st day
of March of the following year,
• Example:
1. If a company is incorporated on 31-12-2013, its first
financial year shall be the period from 31-12-2013 to 31-32014
2. If a company is incorporated on 1-1-2014, its first financial
year will be 1-1-2014 to 31-3-2015
Consolidated financial statements
made mandatory [Section 129]
• Where a company has one or more subsidiaries, it
1. prepare a CFS of the company and all the
subsidiaries in the same form and manner as that
of its own; and
2. lay the CFS also before the AGM of the company
along with the laying of its financial statement
The term "subsidiary" for above purposes shall include:
1. associate company [Section 2(6)] **, and
2. joint venture
Consolidated financial statements
made mandatory….contd.
• The company shall also attach along with its financial statement,
a separate statement containing the salient features of the
financial statement of its subsidiary(s) in prescribed form.
• The provisions of this Act applicable to the preparation,
adoption and audit of financial statements of a holding
company shall, mutatis mutandis, apply to CFS also.
• The auditor of a holding company shall also have the right of
access to the records of all its subsidiaries insofar as it
relates to the consolidation of its financial statement with that of
its subsidiaries.[Section 143(1)].
• Section 143(1) seems to imply that auditor of holding company
shall also be auditor of CFS.
Share Application Money
• The offer or invitation in a financial year is to be made to such
number of persons not exceeding 50 or such higher number as may
be prescribed;
• If a company makes an offer to allot or invites subscription or allots or
enters into agreement to allot securities to more than prescribed
number of persons, the same shall be deemed to be an offer to the
• All monies payable on subscription of securities under this section
shall be paid through cheque or DD or other banking channels but
not by cash [section 42(5) of the 2013 Act];
• Securities to be allotted within 60 days from the receipt of
application money [section 42(6) of the 2013 Act];
• Moneys received on application under this section shall be kept in a
separate bank account in a scheduled bank and shall not be utilized
for any other purpose
Securities Premium Account
• To eliminate conflict with Accounting Standards, section 52(3) of the
2013 Act provides that such class of companies as may be
prescribed whose financial statements comply with Accounting
Standards prescribed for such class of companies under section 133
of the 2013 Act cannot utilize securities premium account
(i) for writing off the expenses of, or the commission paid or
discount allowed on the issue of preference shares or debentures
of the company; or
(ii) for writing off preliminary expenses; or
(iii) for providing premium payable on redemption of any redeemable
preference shares or debentures
Issue of Shares at Discount
• Section 79 of the 1956 Act permitted issue of
shares at a discount subject to certain
• This position has undergone a drastic change as
the 2013 Act has prohibited issue of shares at a
• Schedule II of the Companies Act, 2013 provides the
useful life as against the minimum rates of depreciation
prescribed in Schedule XIV of the Companies Act, 1956;
• For Intangible assets, there is no specific provision in the
Schedule XIV of the Companies Act,
• Now, for intangible assets, the provisions of the
Accounting Standards would be applicable;
• Component Accounting made mandatory: Where cost
of a part of the asset is significant to total cost of the
asset and useful life of that part is different from the
useful life of the remaining asset, useful life of that
significant part shall be determined separately
Revaluation Reserve vis-à-vis Depreciation
The depreciable amount of an asset is:
• the cost of an asset; or
• other amount substituted for cost,
• less its residual value [Part A of Schedule II].
CSR Spending
• Schedule III requires disclosure by way of notes
additional information:
1. regarding aggregate expenditure incurred by the
Companies covered under section 135,
2. on CSR activities
Part II
Related Party Transactions
under Companies Act, 2013
Related Party with reference to a Company - Meaning
a Director or his relative;
a KMP or his relative;
a Firm, in which a director, manager or his relative is a partner;
a Pvt. Co. in which a director or manager is a member or director;
a Public Co. in which a director or manager is a director or holds
along with his relatives, more than 2% of its paid-up share capital;
any Body Corporate of which a director or manager of the company is
a shadow director;
any Shadow Director of the company;
any Company which is—
(A) a holding, subsidiary or an associate company of such company; or
(B) a subsidiary of a holding company to which it is also a subsidiary.
such other person as may be prescribed
Consent of Board in case of
related party transaction
• A company can enter into:
1. specified related party transaction
2. only with approval of Board and subject to
prescribed conditions - Section 188(1) of the 2013
• The consent must be obtained in the Board
meeting and not by circular resolution;
Consent of Board in case of
related party transaction….contd.
• Specified Related Party Transactions:
a) sale, purchase or supply of any goods or materials;
b) selling or otherwise disposing of, or buying, property of any
c) leasing of property of any kind;
d) availing or rendering of any services;
e) appointment of any agent for purchase or sale of goods,
materials, services or property;
f) related party's appointment to any office or place of profit
(OPP) in the Co., its Subsidiary Co. or Associate Co.; and
g) underwriting the subscription of any securities or derivatives
thereof, of the company
Prior approval in general meeting by special resolution
in case of large companies or large contracts
• In the case of a company having:
1. paid-up share capital of not less than Rs. 1 crore,
2. transactions not exceeding prescribed sums**,
the contract or arrangement can be entered into by
company only after prior approval by special
resolution in general meeting - First proviso to
section 188(1) of the 2013 Act.
• **Next Slide
**Prescribed Sums
• For other than OPP: amount exceeding the
higher of:
1. 5% of the annual turnover; or
2. 20% of the net worth
of the company as per the last audited financial
statements of the company
• For OPP: a monthly remuneration exceeding Rs. 1
Lakh p.m.;
• For Underwriting Commission: remuneration for
underwriting exceeding Rs. 10 Lakhs
Case Study
• Reliable Castings Limited is a subsidiary of Unique Machineries
Limited. The Board of Directors of the respective companies have
made the following appointments on a consolidated monthly salary of
Rs. 1.25 Lakhs w.e.f 1.4.2014:
1. Shri Ram Singh a director of Unique Machineries Limited, as factory
manager of Reliable Castings Limited.
2. Shri Rajesh Patel, a director of Reliable Castings Limited, as
purchase manager of Unique Machineries Limited.
3. Shri Sundar, relative of a director of Unique Machineries Limited, as
sales manager of Unique Machineries Limited.
4. Shri Rakesh, not related to any director of both the companies, as
chief accountant of Unique Machineries Limited. But his relative has
been appointed as additional director of Unique Machineries Limited
with effect from 1-5-2014.
The provisions relating to related party
transactions do not apply in certain situations
• Any transactions entered into by the company in its
ordinary course of business, other than
transactions which are not on an arm's length
basis - Third proviso to section 188(1) of the 2013
Disclosure in Board's report of related
party transactions
• Every contract or arrangement entered into under
section 188(1) shall be referred to in the Board's
report to the shareholders along with the
justification for entering into such contract or
arrangement - Section 188(2) of the 2013 Act.
Consequences if contract or arrangement is
not ratified by board/general meeting
• Such contract or arrangement shall be voidable at the
option of the Board;
• The directors concerned shall indemnify the
company against any loss incurred by it;
• Company can recover losses from director or other
• A director is disqualified for appointment, if he has
been convicted of the offence dealing with related party
transactions under section 188 at any time during the
last preceding five years
• Companies to maintain register for:
1. contracts or arrangements which directors are
2. related party transactions
• Loans and advances from and to related parties
shall be disclosed - General Instructions for
Preparation of Balance Sheet - Schedule III of the
2013 Act;
• Disclosures as per AS 18 also required
Part III
Loan to Directors, etc.
Loan to directors, etc.
[Sec 185 (2013 Act) corresponding to Sec 295 (1956 Act)]
• Section 295 of the 1956 Act did not apply to loans made or
guarantee given or security provided by private companies.
Section 185 of the 2013 Act allows no such exemption to
loans, etc., by private companies;
• In terms of section 295 of the 1956 Act, loans made to or
security provided or guarantee given in connection with loan
taken by director of the lending company and certain
specified parties required previous approval of the
Central Government in that behalf. Under section 185 of
the 2013 Act, there is total prohibition on such
Loan to directors, etc.
[Sec 185 (2013 Act) corresponding to Sec 295 (1956 Act)]
• Specified Persons for Section 185:
a) any director of the lending company, or
b) any director of a company which is its holding company, or
c) any partner or relative of any such director;
d) any firm in which any such director or relative is a partner;
e) any private company of which any such director is a director or
f) any body corporate at a general meeting of which not less than 25% of
the total voting power may be exercised or controlled by any such
director, or by two or more such directors, together; or
g) any body corporate, the Board of directors, managing director or
manager, whereof is accustomed to act in accordance with the
directions or instructions of the Board, or of any director or directors, of
the lending company
Loan to directors, etc…..contd.
[Sec 185 (2013 Act) corresponding to Sec 295 (1956 Act)]
• The prohibition shall not apply to the giving of any loan to
a managing or whole-time director:
1. as a part of the conditions of service extended by the
company to all its employees; or
2. pursuant to any scheme approved by the members by a
special resolution
• Penal Provisions:
1. On Company = Rs. 5 Lakhs to Rs. 25 Lakhs;
2. On Director = Upto 6 Months imprisonment or Fine of Rs. 5
Lakhs to Rs. 25 Lakhs or Both
• Under section 295 of the 1956 Act imprisonment could be
avoided by fully repaying the loan. Section 185 of 2013 Act
does not contain such a provision
Part IV
Obligations and Liabilities
Services which auditor should not
provide to the auditee company
• Statutory auditor shall not directly or indirectly
provide any of the prescribed "other services“ to
1. auditee-company; or
2. its holding company; or
3. subsidiary company [Section 144]
Services which auditor should not provide to
the auditee company….contd.
• Prescribed Other Services:
1. accounting and book keeping services;
2. internal audit;
3. design and implementation of any financial information system;
4. actuarial services;
5. investment advisory services;
6. investment banking services;
7. rendering of outsourced financial services;
8. management services; and
9. any other kind of services as may be prescribed.
Requirement of highlighting certain comments
in audit report in thick type or italics omitted
• Section 143(3)(f) omits requirement to highlight
comments in thick type or italics;
• Section 143(3)(f) redrafts the requirement to provide
that auditor's report shall state the observations or
comments of the auditors on financial transactions
or matters which have any adverse effect on the
functioning of the company;
• Section 143(i) of the 2013 Act requires the auditor's
report to state whether the company has adequate
internal financial controls system in place and the
operating effectiveness of such controls
Auditor's duty to AGM
• Section 146 provides that the auditor shall attend
any general meeting:
1. by himself, or
2. through his authorised representative who is
qualified to be an auditor.
• Such attendance is compulsory unless
otherwise exempted by the company.
Auditor's liabilities
Section 147(2) provides as under:
• If an auditor of a company contravenes any of
the provisions relating to:
– appointment of auditors (section 139),
– contents of audit report (section 143),
– compliance with auditing standards (section 143),
– rendering prohibited services (section 144), and
– signing of audit report (section 145),
• the auditor shall be punishable with fine which shall
not be less than Rs. 25,000 but which may extend
to Rs. 5,00,000
Auditor's liabilities….contd.
• If an auditor has contravened such provisions
knowingly or wilfully with the intention to deceive:
1. the company, or
2. its shareholders; or
3. creditors; or
4. tax authorities,
he shall be punishable with:
1. imprisonment for a term which may extend to one
year; and
2. with fine which shall not be less than Rs. 1,00,000
lakh but which may extend to Rs. 25,00,000 [proviso
to section 147(2)]
Auditor's liabilities….contd.
• Section 147(3) provides that where an auditor has been
convicted of an offence as above, he shall be liable to1. Refund the remuneration received by him to the
company; and
2. Pay for damages:
 to the company,
 to the statutory bodies or authorities,
 to any other persons
for loss arising out of incorrect or misleading
statements of particulars made in his audit report
Part V
• Whether dividend declaration/payment barred if company is in
default of repayment of deposits: A company which fails to comply
with section 74 of the 2013 Act shall not, so long as such failure
continues, declare any dividend on its equity shares;
• Whether past losses required to be set off before declaring
dividend: No express provisions along the lines of section 205(1)(b)
of the 1956 Act. Draft Rule 8.2 however requires such set off
• Power of CG to permit declaration of dividend without providing
depreciation: No such power under the 2013 Act;
• Whether transfer to reserves compulsory: No, it is not compulsory.
A company may before the declaration of any dividend in any financial
year, transfer such percentage of its profits for that financial year as it
may consider appropriate to the reserves of the company.
• Payment of dividend through electronic mode to registered
shareholder: Expressly allowed under 2013 Act
Part VI
CARO, 2003 and Auditors
Companies Act, 2013 Obligations
vis-à-vis CARO, 2003
1. Prevention, detection and reporting of frauds by
the auditor;
2. Mandatory obligations regarding internal audit;
3. Reporting on internal controls by the auditors;
Prevention, detection and reporting of
frauds by the auditor
• Clause 4(xxi) of CARO requires auditors to report:
“whether any fraud on or by the company has been
noticed or reported during the year; If yes, the nature
and the amount involved is to be indicated”
• Section 143(12) of the 2013 Act states that: if an auditor
of a company, in the course of the performance of his
duties as auditor, has reason to believe that an offence
involving fraud is being or has been committed against
the company by officers or employees of the company,
he shall immediately report the matter to the Central
Government within such time and in such manner as
may be prescribed
Internal Audit
• Clause 4 (vii) of CARO, 2003 requires auditors to
report: “in the case of:
1. listed companies; and/or
2. other companies having:
• a paid-up capital and reserves > Rs.50 lakhs
as at the commencement of the financial
year concerned, or
• an average annual turnover > Rs. 5 crores
for a period of three consecutive financial
years immediately preceding the financial
year concerned,
• whether the company has an internal audit
system commensurate with its size and nature
of its business”
Internal Audit [Section 138]
• Such class or description of companies as may be
prescribed shall appoint an internal auditor to conduct
internal audit of books of account of the company.
• Internal auditor shall be:
1. a Chartered Accountant, or
2. a Cost Accountant, or
3. such other professional as may be decided by the Board.
• CG may make rules to prescribe the manner and the
intervals in which internal audit shall be conducted and
reported to the Board
Internal Audit [Section 138]….Contd.
• The following class of companies shall be required to appoint
an internal auditor or a firm of internal auditors:—
1. every listed company;
2. every public company having paid up share capital of
Rs. 10 crores or more;
3. every other public company:
• which has any outstanding loans or borrowings from
banks or public financial institutions exceeding Rs.
25 crores; or
• which has accepted deposits of Rs. 25 crores or
at any point of time during the last financial year.
Internal Controls
• Clause 4 (iv) of CARO, 2003 requires auditors to report:
“is there an adequate internal control system
commensurate with the size of the company and the
nature of its business, for the purchase of inventory
and fixed assets and for the sale of goods and
services. Whether there is a continuing failure to
correct major weaknesses in internal control system”
• Section 143(3)(i) of 2013 Act requires auditor to report:
“whether the company has adequate internal financial
controls system in place and the operating
effectiveness of such controls”
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