Director's Report 2013
With the application of the Companies Act 2013, the Director's report — which is a part of the Annual Report — has to contain certain disclosures mandatorily. There are, however, no restrictions on voluntary disclosures other than the ones mentioned below.
A list of the disclosures is mentioned hereunder:
Ruchi Anand & Associates help you cover the following mandatory disclosures in the Directors' Report
- Extract of the Annual Return under Section 92.
- The number of meetings of the Board.
- Directors' Responsibility Statement, which shall state as under:
- That the applicable accounting standards are followed in preparation of the financial statements, plus an explanation relating to material departures therefrom.
- The directors selected such accounting policies and applied them consistently, and made judgments and estimates that are reasonable and prudent enough to give a true and fair view of the state of affairs.
- The directors had taken proper and sufficient care for the maintenance of appropriate financial records as per the provisions of this Act, for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities.
- The directors had prepared the annual accounts on a going concern basis.
- The directors, in the case of a listed company, had laid down internal financial controls to be followed by the company, and that such internal financial controls were adequate and operating effectively.
- 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.
- A statement on the declaration given by Independent Directors under sub-section (6) of Section 149. It is the duty of an Independent Director to disclose the given points in his statement, which shall be annexed to the Directors' Report. As per Section 149(10), every independent director shall be appointed for a term of five years, but shall be eligible for re-appointment by passing of a special resolution by the shareholders of the company. In that event, the company must disclose the appointment or re-appointment of the independent director in the Board's Report. In case of a company covered under sub-section (1) of Section 178, the company's policy on directors' appointment and remuneration — including criteria for determining qualifications, positive attributes, and independence of a director, and other matters provided under sub-section (3) of Section 178 — must also be disclosed.
- As per Section 178(1), listed companies have to constitute a Nomination and Remuneration Committee, which should have 3 or more Non-Executive Directors, at least one of whom should be an Independent Director. This committee identifies persons qualified to become directors and eligible for appointment in senior management, and recommends to the Board their appointment, removal, and an evaluation of every director's performance. As per Section 178(3), the Committee decides the criteria for determining qualifications and independence of a director, and recommends a policy to the Board on the remuneration of directors, key managerial personnel, and other employees. This committee ensures that: (a) the level and composition of remuneration is reasonable and sufficient to attract, retain, and motivate quality directors; (b) the relationship of remuneration to performance is clear and meets appropriate benchmarks; and (c) remuneration to directors, key managerial personnel, and senior management balances fixed and incentive pay, reflecting short- and long-term performance objectives appropriate to the company's goals. This policy must be disclosed in the Directors' Report.
- Explanations or comments by the Board on every qualification, reservation, adverse remark, or disclaimer made by the auditor in their report.
- Particulars of loans, guarantees, or investments under Section 186.
- Particulars of contracts or arrangements with related parties referred to in sub-section (1) of Section 188, in the prescribed form.
- Material changes and commitments affecting the financial position of the company, which have occurred between the end of the financial year and the date of the Report.
- The amounts proposed to be carried to reserves.
- The amount recommended to be paid by way of dividend.
- The state of the company's affairs — a snapshot of financial information.
- Conservation of energy, technology absorption, and foreign exchange earnings and outgo.
- A statement on the development and implementation of a risk management policy for the company, including identification of elements of risk which, in the Board's opinion, may threaten the company's existence. As there is no specific definition of risk management under the Companies Act, 2013, this should cover: (a) the meaning and definition of risk management, (b) types of risks, (c) risk assessment, (d) risk identification, (e) risk handling or mitigation, (f) monitoring and reporting, and (g) conclusion.
- For listed companies, and other public companies with paid-up share capital as may be prescribed, a statement on how a formal annual evaluation has been made by the Board of its own performance and that of its Committees and individual directors. Such companies must attach this evaluation statement to the Directors' Report.
- The ratio of the remuneration of each director to the median employee's remuneration, and such other details as may be prescribed, disclosed by every listed company.
- As per Section 177(9), every listed company, or such class of companies as may be prescribed, shall establish a vigil mechanism for directors and employees to report genuine concerns. This mechanism safeguards against victimization of those who use it, and provides for direct access to the Chairperson of the Audit Committee in appropriate or exceptional cases. Details of the mechanism must be disclosed on the company's website, if any, and in the Board's Report.
- Details of the policy developed and implemented on Corporate Social Responsibility initiatives during the year. As per Section 135, certain companies (with turnover above a given threshold) must spend 2% of Average Net Profits — calculated over the immediately preceding three years — on CSR activities; an explanation is required in the Directors' Report if this amount is not spent.
- As per Section 177(14), a director who receives commission from the company, and who is also a managing or whole-time director, is not disqualified from receiving remuneration or commission from a holding or subsidiary company, provided this fact is disclosed in the Board's Report.
- Section 204 mandates a Secretarial Audit for listed companies and companies with paid-up share capital of more than Rs. 100 crores. Clause 49-C(iii) of the Listing Agreement with the Stock Exchanges also requires the Board to periodically review legal compliance reports and the steps taken to address non-compliances. Such companies must attach a Secretarial Audit Report, issued by a Company Secretary in Practice, to the Board's Report.
- The Management Discussion and Analysis report, which forms part of the Annual Report to shareholders, should address the following matters in light of the company's competitive position:
- Industry structure and developments.
- Opportunities and threats.
- Segment-wise or product-wise performance.
- Outlook.
- Risks and concerns.
- Internal control systems and their adequacy.
- Discussion on financial performance with respect to operational performance.
- Material developments in Human Resources/Industrial Relations, including the number of people employed.
