Companies Act 2013: Essential Compliance for Directors and Auditors

Key Compliance Requirements Under the Companies Act, 2013

This document summarizes essential provisions under the Companies Act, 2013 (CA, 2013) related to corporate finance, statutory appointments, and governance roles.

Dividend Definition and Types

A dividend is a portion of a company’s net profits distributed to its shareholders as a return on their investment. It is decided by the Board of Directors and typically approved by the shareholders at the Annual General Meeting (AGM).

Key Types of Dividends

• Interim Dividend: Declared by the Board of Directors during the financial year, before the AGM.
• Final Dividend: Declared at the AGM after the financial year ends and accounts are approved; requires shareholder approval.
• Cash Dividend: The most common type, paid in cash from the company’s profits.
• Stock Dividend: Paid in the form of additional shares instead of cash.
• Special Dividend: A one-time dividend paid due to exceptional profits or circumstances.

Provisions for Declaration and Payment of Dividend

As per the CA, 2013, dividend can only be paid from:

• Current year’s profits after depreciation.
• Past reserves/profits (in specific cases).
• Government grants (in case of government companies).

Conditions for Declaration:

• Depreciation must be provided for.
• Past losses must be adjusted before declaring dividends.
• The company must not have cleared past statutory dues.

Payment Requirements:

• Dividend must be paid within 30 days of its declaration.
• If unclaimed within 30 days, the amount is transferred to the Unpaid Dividend Account within 7 days.
• If still unclaimed for 7 years, it is transferred to the Investor Education and Protection Fund (IEPF).
• Non-compliance attracts penalties, including interest at 18% p.a. for defaulting officers.

Mandatory Accounts Maintenance (Section 128)

Section 128 of the CA, 2013, mandates that every company must maintain proper books of account, including:

1. Cash Book: Records all cash transactions.
2. Journal: For day-to-day transactions.
3. Ledger: For final accounts classification.
4. Profit and Loss Account: Shows operational results (income and expenses).
5. Balance Sheet: Reflects the financial position.
6. Inventory Records: Detailed records for goods or raw materials.
7. Statutory Registers: Registers of members, charges, directors, etc.

Books should be kept at the registered office and retained for at least 8 years.

Appointment and Qualification of Auditors

Auditor Appointment (Section 139)

A company must appoint an auditor at the first AGM, who holds office for 5 years, subject to ratification. The company must inform the Registrar of Companies (ROC) within 15 days of appointment. Rotation of auditors is mandatory for listed and certain other companies.

Auditor Qualification (Section 141)

The auditor must be a Chartered Accountant (CA) with a valid Certificate of Practice, or a firm of CAs (at least one partner must be a CA). The appointment is approved by shareholders via an ordinary resolution.

A person is disqualified if they fall under Section 141(3) (e.g., holding a position of profit in the company or being indebted to the company).

Powers and Duties of an Auditor

The auditor plays a crucial role in ensuring the accuracy and fairness of a company's financial statements.

Powers of an Auditor

1. Access to Books and Records: Right to access all books of accounts, vouchers, and records at any time.
2. Right to Seek Information: Right to ask company officers and employees for necessary information or explanations.
3. Right to Visit Branches: Right to visit any branch office to verify accounts.
4. Right to Receive Notices: Right to receive notices of all general meetings and attend them.
5. Right to Report to Shareholders: Authority to express an independent opinion on financial statements in the audit report.

Duties of an Auditor

1. Audit of Financial Statements: Examine the balance sheet, P&L account, and other statements for accuracy and fairness.
2. Compliance Check: Ensure the company follows applicable laws, rules, and accounting standards.
3. Report Irregularities: Must report any detected fraud, mismanagement, or non-compliance.
4. Maintain Confidentiality: Must not disclose confidential information unless required by law.
5. Report to Members: Prepare and present an audit report to shareholders containing opinions and observations.

Internal Audit Requirements (Section 138)

Internal Audit is a process of continuous and independent evaluation of a company’s internal controls, risk management, and governance, ensuring efficient operations and compliance.

Applicability (Mandatory for):

• Listed companies.
• Public companies with turnover > ₹200 crore or borrowings > ₹100 crore.
• Private companies with turnover > ₹200 crore or borrowings > ₹100 crore.

The internal auditor can be a CA, Cost Accountant, or any professional appointed by the Board (may or may not be an employee). The auditor reports findings to the Audit Committee or Board of Directors.

Selection of Independent Directors (Section 149(6))

Independent directors are appointed to bring unbiased judgment and uphold corporate governance. They must:

• Be a person of integrity with relevant expertise and experience.
• Not have any financial or pecuniary relationship with the company or promoters.
• Be selected by the Nomination and Remuneration Committee.
• Provide consent and a declaration of independence.

Listed companies must appoint at least 1/3rd of the total board as independent directors.

Disqualifications of a Director (Section 164)

A person is disqualified from becoming or continuing as a director if they fall under any of the following conditions:

1. Unsound Mind: Declared to be of unsound mind by a competent court.
2. Insolvency: An undischarged insolvent or has applied to be declared insolvent.
3. Criminal Conviction: Convicted of an offense and sentenced to imprisonment for 6 months or more (if sentenced for 7 years or more, disqualification is permanent).
4. Non-payment of Calls: Fails to pay any call on shares held within 6 months from the due date.
5. Order by Court or Tribunal: Disqualified by a court or tribunal for fraud or misconduct.
6. Company Default (Filing): Director of a company that has not filed financial statements or annual returns for 3 consecutive years.
7. Company Default (Financial): If the company has failed to repay deposits, debentures, dividends, or loans for over 1 year.