Introduction
Section 134(3) of the Companies Act, 2013 [‘the act’] states that a report of the board of directors shall be attached to statements laid down before the company in the general meeting. Section 134(3), read with rule 8 of Companies (Accounts) Rules, 2014, also provides an inclusive list of items required to be disclosed in the board’s report by companies incorporated under the act. As per section 179(3)(g) of the act, the board’s report shall be approved by the board of directors. In this article, we will see some common mistakes regarding the lack of disclosures or inadequate disclosures in the board’s reports in the context of orders passed by the registrar of companies. We shall analyse 8 ROC adjudication orders passed by ROC based in different jurisdictions.
ROC Adjudication orders Here is a list of 8 ROC adjudication orders as referred to above.
The following table gives a detailed overview of some ROC Orders passed for non-compliance of Board reports in the recent years:
| Name of the Company & Name of the ROC | Violation of Section | Details of Violation | Penalty Levied |
| SDU Agritech Private Limited – ROC Bangalore | S.118 read with clause 9 of SS-1 | The inspection officer observes that the company failed to include a statement on compliance with applicable secretarial standards in its Board Report for the years 2016-17, 2017-18, and 2018-19. | On Company: Total 75,000 for three financial years. On two directors:15,000 each for three financial years. |
| M/s Bock Compressors India Private Limited – ROC Ahmedabad | S.134 read with rule 8 of companies (accounts) rules, 2014 | Non-disclosure related to conservation of energy, technology absorption, foreign exchange earnings, and outgoing in the manner prescribed. | On Company: 3,00,000/- On 2 Directors: 50,000 each. |
| Kandan Mutual Benefit Saswatha Nidhi Limited – ROC Chennai | 134 (3) (q) read with Rule 8(5)(x) of the Companies (Accounts) Rules 2014 | Requirement of including a statement in the Board report that the company has complied with provisions relating to the constitution of the Internal Complaints Committee under the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013. | On Company: 3,00,000/- On 1 OID: 50,000/- |
| Smith N Smith Chemicals Limited – ROC Delhi | Section 134 (3) (o) | The company wrongly stated in the FY 2020-21 Board report that it is not required to formulate a policy on CSR. Further, as per the 2nd proviso of section 135(5) of the Act, if the company fails to spend the obligation in the relevant FY, the Board must specify reasons for not spending in the Board’s report. This disclosure of reasons for not spending was missing in the case of the subject company. | On Company: Rs 3,00,000/- On two directors [signatories of Board Report]: Rs 50,000/- each. |
| Muthootu Mini Nidhi Limited – ROC Bangalore | Section 134 r/w Section 118 (10) | For the years 2016-17 & 2018-19, the company has failed to attach form AOC-2 to the director’s report as required under section 134 (3) (h) of the Act. For the years 2016-17, 2017-18 & 2018-19, the company did not disclose the details of the deposit collected in the director’s report as per section 134 (3) (q) r/w Rule 8 (5) (v) of the Companies [Accounts] Rules, 2014. For the years 2016-17, 2017-18 & 2018-19, the company did not disclose in its Board Report a statement on compliance of SS-1 & 2. | On Company: Rs 9,00,000/- On two directors: Rs 1,50,000/- each On one director: Rs 50,000/- [only for 2016-17] |
| TBF Nidhi (Kumbakonam) Limited – ROC Chennai | 134 (3) (f) | The Inspecting officer observed from the Auditor’s report that it is reported that the company has not complied with the accounting standard – 15 r/w Rule 7 of the Companies (Accounts) Rules 2014. It was found that the Board had not provided any explanation or comments in its Board report on the company’s failure to do “actuarial valuation” for gratuity and leave encashment for the FYs 2017-18, 2018-19 & 2019-20. | Rs 9,00,000/- for Three F. Ys Rs 6,00,000/- on 1 OID for three financial years |
| Holitech India Private Limited – ROC Kanpur. | Section 134 (3) (f) | ROC had observed from the audit report for FY 19-20 that the statutory auditor has given a qualified report and mentioned that the company did not have an appropriate system regarding receipt and issue of inventories for production, overheads, trade payable, expenses, which could potentially result in understatement and overstatement of financial. ROC further stated that the company’s Board Report did not include the qualified opinion made by the auditor in his report. Hence, this is a violation of section 134 (3) (f) of the Companies Act, 2013. | On Company: Rs 3,00,000/- On 11 directors: Rs 50,000/- each. |
| Michelin India Private Limited – ROC Chennai | 134(3)(f) | BODs, in their Board Report, did not explain the observations of statutory Auditors regarding deficiencies in internal controls for which statutory auditors could not obtain sufficient and appropriate evidence to provide a basis for opinion. | On Company: 3,00,000/- On 3 OIDs: 50,000 each. |
Analysing the non-compliances:
Statutory audit-related disclosure lapses:
- As per section 134 (3)(f) of the act, the board of directors has to give an explanation of the observations given by statutory auditors in their statutory auditor report. In a few instances, it was observed that companies have failed to disclose the explanation given by the board of directors on the observations given by statutory auditors in their audit report. Further, it was observed that companies have been failing to disclose responses given by the board of directors on non-compliance with accounting standards by the company
Non-disclosure of compliance with certain provisions
- Non-compliance with secretarial standards: It was observed that companies have missed to declare in the board’s report that companies have complied with secretarial standards.
- Compliance with formation of internal complaints committee under Prohibition of Sexual Harassment Act: It was observed that few companies have not disclosed in the board’s report whether companies have formed Internal Complaints Committee.
- Non-disclosure of deposits: In a few cases, companies have taken deposits from directors. This requires disclosure in the board’s report under Rule 8 (5) (v) of the Companies [Accounts] Rules, 2014. It has been observed that companies have neglected to provide disclosures in the board’s report.
- Non-disclosure of form AOC-2: It has been observed that companies have not provided disclosures in form AOC-2 in the board’s report. Disclosures under this part.
- Non-disclosure relating to CSR activities: It is also observed that companies have not disclosed the reasons for not spending on CSR obligations as per section 135 of the act.
Conclusion
In light of the above-discussed orders and the analysis done, we understand that non-compliance concerning board reports will not be triggered compulsorily by non-compliance with section 134. Many sections under the act, some of which are discussed above, require different matters to be disclosed in the board report. Even though this may not lead to non-compliance of 134, it is non-compliance of board report-related disclosures. Hence, the companies, whether listed or not, shall take steps to comply with all the provisions applicable to them or else the company in default may attract penalties.
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