Unit 4 – Statutory Framework

Objectives
After the completion of this unit, you will be able to:
 Understand the meaning of company as per Companies Act 2013.
 Entail schedules under Companies Act 2013.
 Understand schedule III and discuss format of financial statements as per Ind AS.
 Discuss key components of annual report.

Structure

4.1 Introduction
4.2 Historical preview of a new Act
4.3 Meaning of company
4.4 Features of a company
4.5 List of schedules under Companies Act. 2013
4.6 Salient features of Companies Act. 2013
4.7 Schedule III for financial statements as per Ind AS
4.8 Overview of the revised Schedule III – Division II
4.9 Compliance with Ind AS and 2013 Act
4.10 Annual report of a company
4.11 Summary

4.1 Introduction
Companies Act 2013 is an Act of the Parliament of India which regulates incorporation of a
company, responsibilities of a company, directors, and dissolution of a company. The 2013 Act
is divided into 29 chapters containing 470 clauses as against 658 Sections in the Companies Act,
1956 and has 7 schedules. The Act has replaced The Companies Act, 1956 (in a partial manner)
after receiving the assent of the President of India on 29 August 2013. The Act came into force
on 12 September 2013 with only certain provisions of the Act notified.

4.2 Historical Preview of a new Act

The Companies Act, 1956 (hereinafter referred to as the Act), was enacted with the object to
consolidate and amend the law relating to companies and certain other associations.
Simultaneously, Companies Act, 1913, then in force, was repealed.
Many changes have taken place in the national and international economic environment since
the enactment of the said Act. This has made the economy more diverse, complex and
dynamic. In this milieu, the corporate form of organization is increasingly emerging as the
preferred vehicle for economic and commercial activity and has contributed significantly to the
growth of the Indian economy and the emergence of service, information and knowledge-
based enterprises. The number of companies has expanded from 30,000 in 1956 to nearly 8
lakh companies functioning as of date. Companies are now mobilizing resources at a scale
unimaginable even a decade ago, continuously entering into and bringing new activities into
the fold of the Indian economy, exporting a wide range of goods and services and providing
increasing employment opportunities.
The expansion and growth of the Indian economy has also generated considerable interest in
the international investing community. However, there is a need for sustaining growth in a
globalised and competitive environment. The increasing options and avenues for international
business, trade and capital flows have made it imperative for the growing Indian economy to
note only to harness its entrepreneurial and economic resources efficiently but also to be
competitive in attracting investment to sustain the impressive growth recorded by it in recent
years. Many investors are also looking towards the statutory and regulatory framework for the
corporate sector in the country while deciding on their investment options. Modernisation of
corporate regulation, governing various aspects of setting up of enterprises, structures for
sharing of risk and reward, their governance and accountability to stakeholders, financial
procedures and responsibility for disclosures, procedures for rehabilitation, liquidation and
winding up is, therefore, critical to the perceptions of investors and determining their business
and investment decisions.
In the background of the above developments and recognizing that the competitive and
technology driven business environment today require the corporate entities to be provided
greater autonomy of operation and innovation with reasonable process requirements and
compliance costs, a need was felt to help sustain the growth of the Indian corporate sector by
enabling a new legal framework that would be compact, amenable to clear interpretation, and
respond in a timely and appropriate manner to meet the requirements of ever evolving
economic activities and business models, while fostering a positive environment for investment
and growth. In addition, there is also a need to avoid overlapping and conflicts of jurisdiction in
the area of sectoral regulations. Therefore piecemeal re-engineering of the corporate
regulatory framework was not considered adequate to enable the systemic changes required.
Hence, a comprehensive review of the Companies Act, 1956, and introduction of a revised
statutory framework in the form of a new Companies Bill has been considered essential to
achieve the desired reform.
In the above backdrop, the review of the Companies Act, 1956 and drafting of a new
Companies Bill was taken up by the Government on the basis of a detailed consultative process.
A 'Concept Paper on new Company Law' was placed on the website of the Ministry on 4th
August, 2004. The inputs received were put to a detailed examination in the Ministry. The
Government also constituted an Expert Committee on Company Law under the Chairmanship
of Dr. J.J. Irani on 2nd December, 2004 to make recommendations in respect of new Company
Law. The Committee included representatives from concerned Departments and Ministries,
Professional Institutes and trade bodies and individual experts as members or special invitees.
The Committee deliberated extensively on various issues and submitted its report to the
Government on 31st May, 2005. After considering the report of the Committee and other
inputs received from time-to-time, the Government took up the exercise of comprehensive
review of the Companies Act, 1956. Broadly the objective of the review was to—
 i. retain essential features of the existing framework, segregate substantive law from the
procedures to enable a clear framework for good corporate governance that addresses
the concerns of all stakeholders equitably;
ii. revise the law so as to enable a compact statute that is amenable to easy understanding
and interpretation;
iii. enable greater flexibility in procedural aspects so that with the change of time the
procedural framework, to be prescribed through rules, may be amended without
amendment of the substantive enactment;
iv. establish a climate that encourages setting up of businesses and their growth while
enabling measures to protect the interests of stakeholders and investors, including small
investors, through legal basis for sound corporate governance practices and effective
enforcement;
v. provide a framework for responsible self-regulation through determination of corporate
matters through decisions by shareholders, in the background of clear accountability for
such decisions, obviating the need for a regime based on Government approvals;
vi. address the practical concerns of small businesses so that people may deal with and
invest in companies with confidence, promote international competitiveness of Indian
businesses and provide them with the flexibility to meet the challenges of the global
economy;
vii. Incorporate international practices based on the models suggested by the United
Nations Commission on International Trade Law (UNCITRAL); and
viii. provide for a reasonable and appropriate framework for enforcement of the law that
enables proper investigation and imposition of appropriate sanctions comprising of
penalties for non-compliance and punishment for violation of the law and for fraudulent
conduct, keeping in view the experience resulting from past stock market scams and
concerns expressed by Joint Parliamentary Committees thereon.

Finally, a comprehensively revised Bill, the Companies Bill, 2008 was prepared in consultation
with Ministry of Law and was introduced in the LokSabha on 23rd October, 2008 in the 14th
LokSabha and was subsequently referred to the Department related Parliamentary Standing
Committee on Finance for examination and report. However, before the said Committee could
present its report, 14th LokSabha was dissolved and the Companies Bill, 2008 lapsed as per
clause (5) of article 107 of the Constitution of India. In view of this, it is proposed to introduce
the Companies Bill, 2009.

4.3 Meaning of a Company

There are many definitions of a Company by various legal experts. However, Section 2(20) of
the Companies Act, 2013, defines the term ‘Company’ as follows: “Company means a company
incorporated under this Act or under any previous company law.”
Hence, in order to understand the meaning of a Company, it is important to look at the
distinctive features that explain the realm of a Company.

4.4 Features of a Company

A Company is a Separate Legal Entity
One of the most distinctive features of a Company, as compared to other organizations, is that
it acquires a unique character of being a separate legal entity. Hence, when you register a
company, you give it a legal personality with similar rights and powers as a human being.
The existence of a company is distinct and separate from that of its members. It can own
property, bank accounts, raise loans, incur liabilities and enter into contracts. According to Law,
it is altogether different from the subscribers to the Memorandum of Association.
Also, it has a distinct personality which is different from those who compose it. Member can
also contract with the Company and acquire a right against it or incur a liability to it. However,
for any debts, the creditors can sue the Company but the members cannot.
A Company can own, enjoy, and dispose of a property in its own name. While the shareholders
contribute to the capital and assets, the company is the rightful owner of such assets and
capital. Further, the shareholders are not private or joint holders of the company’s property.

Perpetual Succession
Another important feature of a Company is that it continues to carry on its business
notwithstanding the death of change of its members until it is wound up on the grounds
specified by the Act. Further, the shares of the company change hands infinitely, but that does
not affect the existence of the company.
In simple words, the company is an artificial person which is brought into existence by the law.
Hence, it can be ended by law alone and is unaffected by the death or insolvency of its
members.
Limited Liability
One of the important features of a company is the limited liability of its members. The liability
of a member depends on the type of company.
In the case of a limited liability company, the debts of the company in totality do not become
the debts of its shareholders. In such a case, the liability of its members is limited to the extent
of the nominal value of shares held by them. The shareholders cannot be asked to pay more
than the unpaid value of their shares.
In the case of a company limited by guarantee, members are liable only to the extent of the
amount guaranteed by them. Further, this liability arises only when the company goes into
liquidation.
Finally, if it is an unlimited company, then the liability of its members is unlimited too. But such
instances are very rare.
Artificial Legal Person
Another one of the features of a company is that it is known as an Artificial Legal Person.

Artificial – because its creation is by a process other than natural birth

Legal – because its creation is by law, and
Person – because it has similar rights to a human being.
Further, a company can own property, bank accounts, and do everything that a natural person
can do except go to jail, marry, take an oath, or practice a learned profession. Hence, it is a legal
person in its own sense.
Since a company is an artificial person, it needs humans to function. These humans are
Directors who can authenticate the company’s formal acts either on their own or through the
common seal of the company.
Common Seal
While a company is an artificial person and works through the agency of human beings, it has
an official signature. This is affixed by the officers and employees of the company on all its
documents. This official signature is the Common Seal.
However, the Companies (Amendment) Act, 2015 has made the Common Seal optional. Section
9 of the Act does not have the phrase ‘and a common seal’ in it. This provides an alternative
mode of authorization for companies who do not wish to have a common seal.
According to this amendment, if a company does not have a common seal, then the
authorization shall be done by:
 Two Directors or
 One Director and the Company Secretary (if the company has appointed a Company
Secretary).

4.5 List of Schedules under Companies Act 2013

1. Schedule I: Memorandum and Articles (Section 4 and 5)
2. Schedule II: Depreciation (Section 123)
3. Schedule III: Balance Sheet and Statement of Profit & Loss (Section 129)
4. Schedule IV: Code for Independent Directors (Section 149(8))
5. Schedule V: Appointment of managing director, whole-time director or manager
(Section 196 and 197)
6. Schedule VI: Infrastructure Projects (Section 55 and 186)
7. Schedule VII: Corporate Social Responsibility (Section 135)

4.6 Salient features of Companies Act, 2013

1. The act has launched all new class action suits that keep the shareholders as well as
the stakeholders more aware and informed regarding their major rights.
 2. The act lends more power to shareholders wherein their approvals are required for
numerous important transactions.

3. It insists on appointing a minimum of 1 female director on the company’s board (for

companies in specific class).

4. The act requires companies in specific class to spend specified amount on initiatives
or activities that reflect CSR (Corporate Social Responsibility) on an annual basis.

5. It has launched the National Company Law Tribunal as well as the National Company
Law Appellate Tribunal for replacing the Company Law Board in addition to the Board for
Industrial and Financial Reconstruction.

6. The act has proposed a simple and fast track process for mergers as well as
amalgamations of companies in specific class like the subsidiary and holding, as well as small
organizations after they have obtain the government’s approval.

7. It also gives permission to international mergers, either ways i.e. a foreign

organization merging into an Indian Company, and vice versa. However, such mergers would
take place only after permission has been duly obtained by the RBI.

8. The act prohibits insider trading and forward dealings. It places prohibition on the
directors as well as the key management members from buying the call as well as the put
options of the company’s shares, in cases where the individual is capable of accessing any
information that is price sensitive.

9. The Act lays down that a private ltd. company can now have a maximum of 200
shareholders as opposed to 50 that was permitted in the Companies Act, 1956.

10. An association or partnership may have the maximum partners/person as prescribed

but it should not exceed 100. However, the above restriction is not applicable to a partnership
or association constituted by the Chartered Accountants, Lawyers and Company Secretaries etc.
as they need to follow their specific laws.
 11. The Act has also introduced a new type of Pvt. Company - One Person Company.
Such company can have just 1 director as well as 1 shareholder. The previous act required a
minimum of 2 shareholders as well as 2 directors for establishing a Pvt. Company.

12. The Companies Act 2013 has provided for entrenchment in the articles of
association.

13. The Act has given a proposal for E-Governance in case of numerous company
procedures such as maintenance as well as electronic inspection of documents, keeping the
books of accounts in electronic format, placement of company’s financial statements on their
website, etc.

14. Each company must have a minimum of 1 director who must have stayed in the
country (India) for at least 182 days and not less.

15. The Act also states that at least 1/3rd of the company’s board should consist of
independently operating directors in the case of all the listed organizations. Similar other
classes or class of public organization must also appoint independently operating directors. No
independently operating director may hold the office for over 2 terms of 5 years consecutively.

16. The Act states that the companies must give a prior 7 days’ notice before calling a
board meeting. Companies may send the notice electronically to every single director at his/her
registered address.

17. The Act also defines all the specific duties of a company director.

18. It doesn’t place any restriction on a company in India to indemnify (compensation

for loss or harm) its officers and directors, which was earlier applicable in the previous act.

19. The Act insists on rotation of auditors as well as auditing firms in the case of a public
company.

20. The Act places prohibition on auditors for the performance of non-auditing service
for the organization where they have been appointed as auditors for the purpose of ensuring
accountability and independence of auditors.
 21. The liquidation and rehabilitation procedure of the organizations dealing with
financial problems have become time bound as per the new act.

4.7 Schedule III for financial statements as per Ind AS

The Schedule III to the Companies Act, 2013 (2013 Act) provides general instructions for
preparation of the balance sheet and the statement of profit and loss of a company.

Background

The Schedule III to the Companies Act, 2013 (2013 Act) provides general instructions for
preparation of the balance sheet and the statement of profit and loss of a company.

The Ministry of Corporate Affairs (MCA) issued a road map for implementation of the Indian
Accounting Standards (Ind AS) converged with the International Financial Reporting Standards
(IFRS):

 On 16 February 2015 by companies other than insurance companies, banking

companies and Non-Banking Financial Companies (NBFCs) (corporate road map) in a
phased manner commencing from accounting periods beginning on or after 1 April 2016
 On 30 March 2016 by banking companies, insurance companies and NBFCs in a phased
manner commencing from accounting periods beginning on or after 1 April 2018.

New development

The MCA on 6 April 2016, amended Schedule III to include general instructions for preparation
of financial statements of a company whose financial statements are required to comply with
Ind AS. The amendment divides Schedule III into two parts i.e. Division I and II

 Division I is applicable to a company whose financial statements are required to comply

with the current accounting standards
 Division II is applicable to a company whose financial statements are drawn up in
compliance with Ind AS.

4.8 Overview of the revised Schedule III – Division II

Division II of the Schedule III provides instructions for preparation of financial statements and
additional disclosure requirements for companies required to comply with Ind AS.

The following is an overview of the Division II of the Schedule III:

Applicability

 It is applicable to every company to which Ind AS apply in preparation of its financial

statements.
 The provisions of Schedule III also apply when a company is required to prepare
consolidated financial statements, in addition to the disclosure requirements specified
under Ind AS.

4.8.1 Balance sheet

 Schedule III provides a format of the balance sheet and sets out the minimum
requirements of disclosure on the face of the balance sheet
 Items presented in the balance sheet are to be classified as current and non-current.
 Schedule III does not permit companies to avail of the option of presenting assets and
liabilities in the order of liquidity, as provided by Ind AS 1, Presentation of Financial
Statements.

4.8.2 Statement of profit and loss

 Schedule III provides a format of the statement of profit and loss and sets out the
minimum requirements of disclosure on the face of the statement of profit and loss.
 The statement of profit and loss is to be presented in accordance with the nature of
expenses and would include profit or loss for the period and other comprehensive
income for the period.

4.8.3 Statement of changes in equity

 This is a new component for preparers of financial statements that have historically
prepared financial statements under Indian GAAP.
  The Statement of changes in equity would reconcile opening to closing amounts for
each component of equity including reserves and surplus and items of other
comprehensive income.
 The format also includes disclosure of the equity component of compound financial
instruments in ‘other equity’, which is in accordance with Ind AS 32, Financial
Instruments: Presentation.

4.8.4 Statement of cash flows

The Statement of cash flows would be presented when required in accordance with Ind AS 7,
Statement of Cash Flows.

Notes

Notes containing information in addition to that which is presented in the financial

statements would be provided, including, where required, narrative descriptions or
disaggregation of items recognized in the financial statements and information about
items that do not qualify for such recognition.

4.9 Compliance with Ind AS and 2013 Act

In situations where compliance with the requirements of the 2013 Act including Ind AS requires
any change in treatment or disclosure (including addition, amendment, substitution or deletion
in the head/sub-head or any changes in the financial statements or statements forming part
thereof) in the formats given in Schedule III, then Schedule III permits such changes to be made
and the requirements of Schedule III would stand modified accordingly.

It further mentions that disclosure requirements specified in Schedule III would be in addition
to and not in substitution of the disclosure requirements specified in Ind AS. Companies would
be required to make additional disclosures specified in Ind AS either in the notes or by way of
additional statement(s) unless required to be disclosed on the face of financial statements.
Similarly, all other disclosures as required by the 2013 Act should be made in the notes in
addition to the requirements of Schedule III.
 Materiality

It requires financial statements to disclose all ‘material’ items, i.e., the items if they could,
individually or collectively, influence the economic decisions that users make on the basis of
financial statements. Materiality depends on the size and nature of the item judged in
particular circumstances. The definition of what is material is similar to that given in Ind AS 8,
Accounting Policies, Changes in Accounting Estimates and Errors. However, while preparing the
statement of profit and loss, it specifies that a company should disclose a note for any item of
income or expenditure which exceeds 1 per cent of the revenue from operations or INR 10,00,
000, whichever is higher, in addition to the consideration of materiality.

4.9.1 Balance Sheet format as per Schedule III

Balance Sheet as at 31st March,

Particulars Note No April

I. EQUITY AND LIABILITIES

(1) Shareholder's Funds J

(a) Share Capital K 0
(b) Reserves and Surplus L 0
(c) Money received against share warrants M
(2) Share application money pending
allotment N

(3) Non-Current Liabilities

(a) Long-term borrowings O 0
(b) Deferred tax liabilities (Net) P
(c) Other Long term liabilities Q
(d) Long term provisions R

(4) Current Liabilities

(a) Short-term borrowings S 0
(b) Trade payables T 0
(c) Other current liabilities U 0
(d) Short-term provisions V 0
Total 0
(1) Non-current assets
(a) Fixed assets H
(i) Tangible assets 0
(ii) Intangible assets
(iii) Capital work-in-progress
(iv) Intangible assets under development
(b) Non-current investments W
(c) Deferred tax assets (net) X
(d) Long term loans and advances Y
(e) Other non-current assets Z 0

(2) Current assets

(a) Current investments AA 0
(b) Inventories E 0
(c) Trade receivables AB 0
(d) Cash and cash equivalents AC 0
(e) Short-term loans and advances AD 0
(f) Other current assets AE 0
Total 0

4.9.2 Statement of Profit & Loss

STATEMENT OF PROFIT AND LOSS

Profit and Loss statement for the year ended 31st March,
Note
Particulars AMOUNT
No

I. Revenue from operations A 0

LESS EXCISE DUTY B 0
REVENUE FROM OPERATION (NET) 0
II. Other Income
III. Total Revenue (I +II) C
IV. Expenses: D 0
Cost of materials consumed E 0
Purchase of Stock-in-Trade F 0
Changes in inventories of finished goods, work-in-
progress and Stock-in-Trade
G 0
Employee benefit expense H 0
Financial costs I 0
Depreciation and amortization expense 0
Other expenses
 Total Expenses 0

V. Profit before exceptional and extraordinary

items and tax 0

VI. Exceptional Items 0

VII. Profit before extraordinary items and tax (V -

VI) 0

VIII. Extraordinary Items 0

IX. Profit before tax (VII - VIII) 0

X. Tax expense:
(1) Current tax
(VII-
(2) Deferred tax VIII) 0

XI. Profit(Loss) from the period from continuing

operations 0

XII. Profit/(Loss) from discontinuing operations 0

XIII. Tax expense of discounting operations 0

XIV. Profit/(Loss) from Discontinuing operations

(XII - XIII) 0

XV. Profit/(Loss) for the period (XI + XIV)

XVI. Earning per equity share:

(1) Basic
(2) Diluted

4.10 Annual Report of Company

The single source of getting information about any company whether it is the past or present
performance or for that matter, the future outlook, detailed financial performance through the
financial statements, corporate governance or CSR activities, all is compiled in the Annual
Report of the company. It helps in assessing the year’s operations and provides the company’s
view of the upcoming year and future prospects. It is a report that each company must provide
to its shareholders’ at the end of the financial year, rather it is a report that every investor must
read. It is the most comprehensive means of communication between a company and its
stakeholders, rightly called the pinnacle of corporate communications.

Key constituents of Annual Report:

The major components of the annual report mirror the psyche of the company, giving a fair
idea on the sustainability of business and how sound the business is.

Letter from the Chairman: This part of the annual report mainly tells you how the company has
performed during the year. It’s a place to find apologies and reasons if the performance
doesn’t meet the expectations. The goals and strategies for the future are also laid down by the
leading hands in this section of the annual report.

Ten-year financial summary: Assuming that a company is at least ten years old, many annual
reports contain a snapshot of the financial results over that period of time. This helps in seeing
the growth / de-growth trend of revenues and profits and other leading indicators of a
company’s financial success.

List of directors and other officers: All the data regarding the leading managers like the
president, chief executive officer (CEO), vice presidents, chief financial officer (CFO) is provided
here. Also, information pertaining to the other seniors who may not be a part of the
organization, but are present on the board of the company, to help and guide the organization
is available in this section of the annual report.

Management discussion and analysis (MD&A): This is the place where the company’s
management has the opportunity to present a discussion on the significant financial trends
within the company over the past couple of years. It also includes data on the industry of which
the company is a part of. Reading between the lines gives all the hints that the management is
trying to indicate regarding where the company is and where is it expected to be. It also
contains a brief SWOT analysis (strength, weakness, opportunity and threat) and highlights the
business strategy that the management intends to follow for the coming fiscal.
Director’s report: The director’s report comprises of all the key events that happened during
the reporting period. It contains all the information like summary of financial, operational
performance analysis, details of new ventures, partnerships and businesses, performance of
subsidiaries, details of change in share capital and details of dividends. In short, it provides a
recap of the fiscal year under consideration.

Corporate information: Subsidiaries, brands, addresses: This section has all the information
regarding company locations (domestic and foreign), contact information, as well as brand
names and product lines.

General shareholders’ information and corporate governance: The report on corporate

governance covers all the aspects that are essential to the shareholder of a company and are
not a part of the daily operations of the company. It provides all the details regarding the
directors and management of the company, for e.g. their background and remuneration. It also
provides data regarding board meetings as to how many directors attended how many
meetings. It also provides general shareholder information such as correspondence details,
details of annual general meetings, dividend payment details, stock performance (stock history,
stock price trends, listing stock exchanges), details of registrar and transfer agents and the
shareholding pattern.

Financial statements and schedules: This section includes the financial performance data of the
company. It provides details regarding the operational performance and financial strength of a
company during the reporting period through the income statement, balance sheet and cash
flow statement. The footnotes are equally important as they provide information about the
organization’s structure and financial status that has not been covered anywhere else in the
report. For example: information on management reorganization or details on bad debts that
was written off by the company. Further, the schedules provide a detailed breakup of the
individual components of the financial statements.

a) Profit and Loss statement: It is the financial statement that summarizes the revenues, costs
and expenses incurred during a specific period of time. It clearly indicates how much was
earned and what went into getting those earnings.
b) Balance Sheet: This provides the summary of the assets and liabilities of a company. It gives
a fair idea of what the company owns and what it owes.

c) Cash Flow: Cash Flow Statement is the accounting statement that provides the details of how
much cash is generated and used by the company over a specific period of time.

Notes to Accounts

This is one section of the annual report that provides information on accounting policy followed
by a company such as comments on depreciation method, forex losses/gains, segmental
reporting, inventories, liabilities, leases, etc. It’s always advisable to study annual reports of at
least 3-5 years as the reader will be able to understand minute details like changes in
accounting year or accounting policy that can directly affect the company’s revenue, key
operations of the company, financials and management’s view/stand in various economic
trends.

4.10.1 Reading an Annual Report:

Although one would have all the information about a company readily available, there are
certain things to keep in mind while browsing an annual report.

 One should have the skill to read the annual report to the extent that one can pick the
hints that the company provides regarding future growth or disasters expected. These
are indicated in the Chairman speech, MD&A or the sales and marketing section if any.
 Review the company’s financial statements and look for trends in profitability, growth,
sustainability and dividends.
 Footnotes and schedules are to be carefully read for complete understanding of the
financial statements.
 Carefully read the letter of Auditor opinion to be sure that the financial statements are
an accurate representation of the company’s financial reality.

4.10.2 Objectives of Annual Report: It is made with the following objectives:

 Taking prospective economic decisions

  Providing information about the financial position, performance and changes in financial
position of an entity
 Presenting and disclosing information about the company
 To lure new investors and make adequate disclosures to the existing ones

4.10.3 Purpose of Annual Report:

 Provide Financial Information

An annual report provides information on the company’s fiscal year. The financial information
provided in the annual reports helps determine the current status of business, how the
company is funding operations and growth, and how good the company is placed at making
money for its investors.

 Accountability

Annual report is considered as the main accountability mechanism. Accountability is a pre-

requisite, as it gives an idea of how far the company has met its responsibilities towards its
owners, and fulfilled the role defined, which through the financial reports should reflect the
extent of performance that are related to the entity.

 Decision making

The objective of reporting the financial statements’ is to inform about the performance of the
company that could be helpful to a wide range of potential users for evaluating and making
economic decisions.

4.11 Summary:

 Companies Act 2013 is an Act of the Parliament of India which regulates incorporation
of a company, responsibilities of a company, directors, and dissolution of a company.
The 2013 Act is divided into 29 chapters containing 470 clauses as against 658 Sections
in the Companies Act, 1956 and has 7 schedules.
  Companies Act, 2013, defines the term ‘Company’ as follows: “Company means a
company incorporated under this Act or under any previous company law.”
 “ A registered association which is an artificial legal person, having an independent legal
entity with a perpetual succession, a common seal for its signatures, a common capital
comprised of transferable shares and carrying limited liability.”
 The single source of getting information about any company whether it is the past or
present performance or for that matter, the future outlook, detailed financial
performance through the financial statements, corporate governance or CSR activities,
all is compiled in the Annual Report of the company. It helps in assessing the year’s
operations and provides the company’s view of the upcoming year and future
prospects. It is a report that each company must provide to its shareholders’ at the end
of the financial year, rather it is a report that every investor must read. It is the most
comprehensive means of communication between a company and its stakeholders,
rightly called the pinnacle of corporate communications.

4.12 Keywords

Company - Company means a company incorporated under this Act or under any previous
company law.

Separate Legal Entity - When you register a company, you give it a legal personality with similar
rights and powers as a human being.

Perpetual Succession - it continues to carry on its business notwithstanding the death of

change of its members until it is wound up on the grounds specified by the Act.

Limited Liability - The debts of the company in totality do not become the debts of its
shareholders. In such a case, the liability of its members is limited to the extent of the nominal
value of shares held by them.

Artificial – its creation is by a process other than natural birth.

Legal – its creation is by law.

Person – It has similar rights to a human being.

Common Seal - While a company is an artificial person and works through the agency of human
beings, it has an official signature. This is affixed by the officers and employees of the company
on all its documents. This official signature is the Common Seal.