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Non-Compliance – Board’s Report Disclosures - MMJC
Background
Section 134(3) of Companies Act, 2013 (‘the Act’) states that a report by board of directors shall be attached to statements laid 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 board’s report by unlisted companies except one person company and small company. As per section 179(3)(g) of the Act financial statements and board’s report shall be approved by board of directors. In this article we shall see adjudication orders passed by Registrar of Companies (‘ROC’) where inter-alia directors of the company were penalized for non-disclosure or inadequate disclosure of information required to be provided in board’s report as per section 134(3) of the Act.
Introduction
In this article we shall analyse selected nine ROC adjudication orders passed by ROC pertaining to non-compliance of section 134(3) of the Act. Till date ROC’s have passed 62 orders penalising non-compliance with section 134(3) of the Act. This study shall aid in improving one’s articulation and grasp on Section 134 and shall further back companies to avoid such mistakes which later lead to heavy penalties.
However, where disclosures referred to in sub-section (3) have been included in the financial statements in that case such disclosures shall be referred to instead of being repeated in the Board’s report again. Where the policy referred to in clause (e) being company’s policy of directors or clause (o) being Corporate Social Responsibility policy is made available on company’s website, if any, it shall be sufficient compliance of the requirements under such clauses if the salient features of the policy and any change therein are specified in brief in the Board’s report and the web-address is indicated therein at which the complete policy is available. Section 134 comes under the ambit of adjudication and therefore, the Registrar of Companies [ROC] has the power to adjudicate non-compliances under section 134. In the recent years ROC has passed several orders for section 134 and on studying these orders in depth we can understand and analyse the type of non-compliances that are recurring relating to Board reports.
The following table gives a detailed overview of some ROC Orders passed for non-compliance of Board report 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 | Non-disclosure of statement on compliance with SS in Board report as required under SS for FY 17,18,19. | On Company: Total 75,000 for 3 financial years. On 2 directors:15,000 each for 3 financial years. |
| M/s Bock Compressors India Private Limited – ROC Ahmedabad | S.134 | Disclosure regarding energy conservation is not mentioned in the Board Report. | On Company: 3,00,000/- On 2 Directors: 50,000 each. |
| Michelin India Private Limited – ROC Chennai | 134 | BODs in their Board Report did not offer any explanation for the observations of statutory Auditors | On Company: 3,00,000/- On 3 OIDs: 50,000 each. |
| Kandan Mutual Benefit Saswatha Nidhi Limited – ROC Chennai | 134 (3) (q) read with Rule 8 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 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/- |
| 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 specified under section 133 of the Act 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 FY’s 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 |
| Smith N Smith Chemicals Limited – ROC Delhi | Section 134 (3) (o) | Company wrongly stated in the Board report for the F.Y 2020-21 that it is not required to formulate policy on CSR. Further as per the 2nd Proviso of section 135 (5) of the Act, there is a requirement that if the company fails to spend the obligation in the relevant F.Y, 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 2 directors [signatories of Board Report]: Rs 50,000/- each. |
| Holitech India Private Limited – ROC Kanpur. | Section 134 (3) (f) | The Board Report of the company did not include the qualified opinion made by the auditor in his report. Hence, it 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. |
| 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 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 2 directors: Rs 1,50,000/- each On 1 director: Rs 50,000/- [only for 2016-17] |
| Muthootu Mini Nidhi Limited – ROC Bangalore | Section 134 | 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 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. | [Defaults of three F.Y] On Company: Rs 9,00,000/- [Defaults of three F.Y] On 2 directors: Rs 1,50,000/- each On 1 director: Rs 50,000/- [only for 2016-17] |
Analysing the non-compliances:
The above table gives a list of cases wherein non-compliances with respect to board report are highlighted. Now let us throw light on some of the non-compliances of other sections of the Companies Act 2013 (the Act) wherein non compliances with respect to board report is triggered. Section 133 of the act provides for Accounting Standards which are to be complied by the companies as per section 129 of the act. That means if a company is not complying with Section 129 then that shall activate non-compliance of Section 134 (5) (a). Another important example is with respect to section 135 of the act. As per section 135 the eligible companies shall form CSR policy and as per Section 134 (3)(o) this CSR policy shall be detailed in the Board Report; so, if this is not complied the company activates the noncompliance of Board report. Another important example is section 135(2) that provides for disclosing the composition of the CSR committee in the board report. As per Secretarial Standard -1 the report of the board of directors shall have a statement the company has complied with the applicable secretarial standards. Even though the above non-compliance is not a non-compliance of section 134 but it’s definitely non- compliance of board report.
Non- compliance of Board report in respect of Listed entities-
As per section 134(3)(p) in case of a listed company and every other public company having such paid-up share capital of 25 crore rupees or more calculated at the end of the preceding financial year shall include in the report by its Board of directors a statement indicating the manner in which formal annual evaluation of the performance of the Board, its Committees and of individual directors has been made. Non –compliance of the same shall be non-compliance of the Board report.
Conclusion
In light of the above discussed orders and the analysis done, we have understood that non-compliance with respect to board report will not compulsorily get triggered by the non-compliance of section 134. There are many sections under the act some of which discussed above requires different matters to be disclosed in the board report. Even though this may not lead to non-compliance of 134 but it is non-compliance of board report. 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 heavy penalties. The Penalty for companies shall be three lakh rupees and the officers in default shall be liable to a penalty of fifty thousand rupees.