Section 129 of Companies Act, 2013

This article is written by Arnisha Das. The article gives an in-depth understanding of Section 129 of the Companies Act, 2013 defining financial statements of a company. It is significant to ensure the overall growth potential in an organisation during any financial year.

It has been published by Rachit Garg.

“You have to understand accounting and you have to understand the nuances of accounting. It’s the language of business and it’s an imperfect language, but unless you are willing to put in the effort to learn accounting – how to read and interpret financial statements – you really shouldn’t select stocks yourself” – Warren Buffet.

A financial statement is a pivotal document for a company. It consists of all the records of a company’s revenue, expenses, debts or dues, investments, sales, profitability, etc. in a specific financial year. Preparing a financial statement not only enhances the transparency of all the useful transactions of a company but also shields the company against unnecessary legal challenges. The Companies Act, 2013 (herein referred to as the “Act”) provides the provisions on annual financial statements of a company under Section 129, along with Schedule III Division I of the Act. The shareholders of an organisation need the financial report to record the overall growth, equity, shares, mismanagement, dividends, and revenue of a company in a particular financial year. They need to produce these financial statements in the annual general meeting before the board of members to decide the progress and pitfalls till a certain period to chart the future course of the business.

Section 2(40) of the Companies Act 2013 states that ‘financial statements in relation to a Company’, except a ‘one person company’, include a balance sheet per financial year, profit and loss account or income or expenditure account, cash flow statements for a particular financial year and any explanatory note corresponding to all the other required documents of a company. A ‘one person company’, on the other hand, requires all the above documents except cash flow statements. Examining all the contingent documents makes the investors more vigilant about investing in a company and helps keep the accuracy and completeness in the auditor’s report at the end of the year. This article shall dig into all the important aspects pertaining to financial statements under Section 129 of the Companies Act, 2013 ensuring long-term financial success for a corporate body or organisation.

A company having different operations to carry out on a daily basis needs a well-drafted financial statement that details out all the financial affairs in a particular year. Section 129 the Companies Act, 2013 interprets ‘financial statements’ as the statements giving the ‘true and fair view’ of the transactions or the state of affairs of the company. So, the information in the financial statements must be accurate, reliable, and unbiased. It can be formulated at any point of time in a financial year. However, the typical period for which it is generated are classified into two – (i) Annual Financial Statements; and (ii) Quarterly Financial Statements. Annual financial statements are typically drafted once or at the end of a financial year. On the other hand, according to the guidelines of SEBI (Securities and Exchange Board of India), any listed company should maintain the records of its financial statements on a quarterly basis.

Clause-wise Explanation of Section 129 of Companies Act, 2013

Sub-section (1) of Section 129 of the Act draws a picture of financial statements as any company shall present the ‘true and fair view of the state of affairs of the company or companies’ and also such statements should be in compliance with the tenets of Section 133 (prescribed accounting standards by the Central Government) of the Act.
Complying with the Schedule III Division I of the Act, it should vary in its ‘form or forms’ for different classes of companies.
Some organisations, which are preserved by the national government’s acts, are spared from containing the ‘items’ provided under this subsection.
Such organisations, which appear to be out of the purview of this provision, or authorised under Insurance Act, 1938, Insurance Regulatory and Development Authority Act, 1999, Banking Regulations Act, 1949, Electricity Act, 2003, or any other act outside the premise of this provision, will not be required to comply with certain document, unless the contrary is provided.
Sub-section (2) asserts that companies with the annual financial statements shall present it before the Board of Directors of that company in the Annual General Meeting (AGM) in each financial year.
Sub-section (3) claims that companies with ‘one or more subsidiaries’ need to prepare, along with the isolated financial statement, a ‘consolidated financial statement’ that delineates all the financial information, combined with mandates provided by the Central Government occasionally.
Sub-section (4) states that the ‘preparation, adoption and audit of the financial statements’ of the subsidiary companies shall be in the same way as their holding companies.
Sub-section (5) says that the companies, if any, as per Sub-section (1), diverging from the prescribed accounting standards of the Sub-section shall give reasons for such divergence for their exceptional compliance.
As per Sub-section (6), the Central Government may by notification or any application made by any class or classes of companies confer such companies the status of unlisted companies or exempt from the liabilities under this Section. For that purpose, the government must consider appropriate reasoning by the companies in public interest and mandatory regulations of the state.
In case of violation or non-compliance of the laws under this section, according to Sub-section (7), such a company’s whole time director or managing director (in charge of finance), Chief Financial Officer (CFO), or in default of them all the directors shall be penalised with imprisonment upto one year, or fine not less than fifty thousand rupees, which may extend to five lakhs rupees, or, both.

Financial statements, in general, refer to the ‘day-to-day’ business transactions of a company, which are recorded in written form to review the financial performance of a business, quarterly or in a year. These companies require the financial statements to audit the statements, either before the government or a certified accountant of India. The financial aspects, typically, consist of cost, tax, profits, returns, depreciation, etc. of the company. Shareholders, who invest in the company, especially, demand the financial statements in a comprehensive manner to know the financial state of a company at a particular time.

‘Financial Statement’ under Section 2(40) of the Companies Act, 2013 is defined as-

(i) a balance sheet as at the end of the financial year;

(ii) a profit and loss account, or in case of an NGO (Non-profit Organisation), an income and expenditure account for the financial year;

(iii) cash flow statement for the financial year;

(iv) statement of change in equity, if any;

(v) an annexure forming part of any document mentioned in sub-clauses (i) to (iv).

Nevertheless, a one person company [Section 2(62)], small company [Section 2(85)], or dormant company (Section 455) may not include a cash flow statement. Schedule III Division I of the Companies Act, 2013 outlines the procedure while making a financial statement, which should be minutely followed.

Section 134 clarifies that financial statements, along with the Board’s approval report, should contain the overall financial performance of a company in case of a standalone company’s financial statement. On the other hand, companies, with subsidiaries, associates or joint ventures shall require a consolidated financial statement separately attached to it, along with the approval by the Board, to review the economic position of that company.

It requires the ‘Board of Directors’ and the ‘Chairperson’ of the company to approve it before they are finally submitted for auditing. The report should be equipped with all the details, along with the director’s responsibility statement duly annexed and signed for circulation, issue, or publication of each copy. Without any contravention to the guidelines of clause 3 of this Section, the financial statement should meet all the compliances required before being presented before the Annual General Meeting (AGM) (as per Section 96) of the financial year.

For the submission of the ‘Financial Statement’ to the auditor for review should be duly signed by –

the company’s chairperson, authorised by the Board, or
two directors; one of them being a managing director and the other, the chief executive officer (CEO), if he is also appointed as a director, chief financial officer, or company secretary in the company;
one director in case of “one person company” [changes made after the Companies (Amendment) Ordinance, 2018].

The penalty levied as per Section 134(8) of the Act in the happening of any violation of any clause by a company under this Section, includes fine not less than fifty thousand, extendable up to three lakhs and for every officer, who is knowingly a party, shall be punishable with imprisonment up to three years, or with fine not less than fifty thousand, which may extend up to three lakhs, or both [as per the latest Companies (Amendment) Act, 2020).

Listed Items for Standalone Financial Statements under Section 2(40)

A ‘Financial Statement’ as highlighted under this Section includes:-

Balance Sheet

One of the crucial components, a balance sheet in a financial statement contains the assets and liabilities of a company at the end of the financial year. It is divided in a table that enlist all the transaction details of the total assets, liabilities, and the equity of the shareholders in a business. This demonstrates the capability of shareholding and monetary policy essential for the long-term business venture of a company.

Income Statement

The statement of profit and loss or the income statement is the overview of the financial performance of a company. It calculates the net revenue in addition to the earnings per share of the company’s stock. Unlike a balance sheet, which poses as a snapshot of the company’s financial position at a particular point, an income statement can be prepared quarterly. It is a valuable instrument for making informed decisions and planning for the future of a business.

Cash Flow Statement

A cash flow statement tracks the movement of money in and out over a given timeframe. It provides detailed perspective on the company’s liquidity, equity, financial operations, repurchased shares, dividends paid to shareholders, & others for evaluation of the company’s health and capacity to generate cash and meet obligations.

Additional Note

An additional note functions as a supplement to the balance sheet, statement of profit and loss or income statement regarding payments, expenses incurred and changes of equity occurred over time. It is an integral part of the overall financial statement that provides a more in-depth understanding of other components of the balance sheet to pay close attention to the business activities.

Consolidated Financial Statements

The Companies (Accounts) Amendment Rules, 2014 require all companies including unlisted and private companies with one or more subsidiaries to prepare consolidated financial statements that comply with the prescribed accounting standards. It is also mentioned under Section 134(1) of the Companies Act, 2013. The rule applies to all companies unless the central government exempts a particular class or classes of companies from compliance with any of such requirements.

The consolidated financial statement is only required if a company has one or more subsidiaries including associates or joint ventures. A listed company must account for its investments in associates, irrespective of whether it has a subsidiary or not, whereas an unlisted company does not have to consolidate unless it has a subsidiary. The board of the parent company of the subsidiaries must approve and give signature to the consolidated financial statements before their final reporting.

Company’s Accounting Standards or Indian Accounting Standards (AS) as per Section 133 of the Act

Chapter IX (Sections 128 – 138) deals with accounting statements of a company in the Companies Act, 2013. Schedule III read with Section 129 gives details about a company’s financial statements. The regulation of accounting standards (under Section 133 of the Act) should be parallel to the guidelines provided by the Ministry of Corporate Affairs (MCA) as well as the Ind AS (Indian Accounting Standards) by the Institute of Chartered Accountants of India (ICAI). Additionally, the accounting standards are formulated considering the advice and regulatory requirements set by the National Financial Reporting Authority (NFRA).

The Central Government investigates the regulation and compliance of such statements through the governing body, NFRA or the National Financial Reporting Authority, constituted under Section 132 of the Companies act. It monitors the policies and compliance and makes recommendations to the class or classes of companies, or auditors. In case of any non-conformity of any regulation, it works as an ombudsman to synchronise the quality of compliance.

Requirements to follow under Division I of Schedule III for making Financial Statements of a Company

The Companies Act, 2013 refers to the ‘true and fair view’ of records of financial statements of a company. These registered companies must adhere to the legal and regulatory requisites that include preparation of financial statements. The Division I of Schedule I of the Companies Act, 2013 specifies the general allowance and presentation of the balance sheet and profit and loss helping in the preparation of the funds information per annum.

These rules are summarised as below:-

As per the Companies (Accounting Standards) Rules, 2006, companies that comply with the aforementioned provision are required to ensure their conformity. Conformity, however, might be affected once amendments are carried out. Companies which have to comply with the Companies Act, 2013 and the Rules of 2006 must issue the balance sheet as per the modified rules and regulations outlined in the Act thereby.
All other disclosures stipulated according to the Act are the same as the accounting guidelines set out in the Schedule. Besides these disclosure requirements stated as per Division I of Schedule III, any additional information related to disclosure requirements shall continue to exist separately with the regulations firmly set out under disclosure requirements.
‘Notes to accounts’ head in the companies’ financial statements is the only category under which they can provide additional details. The information will furnish apart from what is distributed and contain details for all the items spread through the financial year. The Section will include a list of those items that do not meet the listed set of criteria for these recognised items and further information about these. The balance sheet and statement of profit and loss must be done in a way that supplies all the correct information of the owner’s contribution on both the statement of income and statement of owner’s equity.
The turnover or total income of a company can be shown in the financial statements after rounding off in the following manner:

When the annual turnover of a company is less than hundred crore rupees, the amount is rounded off to the nearest hundreds, thousands, lakhs, millions, or decimals thereof.
When the annual turnover reaches one hundred crore rupees or more, the amount is rounded off to the nearest lakhs, millions, crores, or decimals thereof.

Companies, just as they file their financial statement must also constantly disclose information about the previous financial statement for the items covered in the current report. This data is the business’ financial overview comparing the health of the business with the last few years in terms of financial growth. An opening financial statement of the company is a comparison-free statement.

The Companies (Amendment) Act, 2020: Embodiment of Section 129A

The Companies (Amendment) Act, 2020 has inserted a new Section 129A with the previous Section 129, that is significant with regards to implementing periodical review of financial statements for the unlisted companies according to the guidelines of MCA.

The Central Government may, require such class or classes of companies of unlisted companies, as may be prescribed [w.e.f. 22.1.2021] –

To prepare financial results of the company on such periodical basis and in such form as may be prescribed;
To obtain approval of the Board of Directors for completing audit and limited review of such periodical financial results in such manner as may be prescribed; and
File a copy with the Registrar within a period of thirty days of completion of the relevant period with such fees as may be prescribed.

Quarterly reports of financial statements involve more real-time information being released to the public, which believes that officials should be able to act when any systematic mishap of management and governance goes down sharply. The ministry aims at heightened transparency in business in terms of ownership, investment, managerial decision, as well as public interest. The recent example of BYJU’S corporate governance deterioration have garnered the concerns raised regarding companies’ adherence to financial regulations under the Companies Act, 2013 as well as the FEMA Act (Foreign Exchange Management Act), 1999. The authorities need to closely monitor and ensure appropriate measures put in place by the directors or stakeholders in a company for calibrated growth.

Benefits of Involving Unlisted Companies in the Process

The MCA, to some extent, and the SEBI regulations control and supervise unlisted markets in India. Although the Companies Act, 2013 bestows the right to conduct investigations into or penalise any unlisted company, as well as its board members, that violate applicable laws. SEBI has the power to control any company that is not listed but which has been able to raise funds in public.

According to a report by MCA, about 11-12 lakhs of registered companies are active, where only 6500 are licensed through public stock exchange. Thus, the larger part remains as unlisted. By inclusion of Section 129A, the ministry is expected to have far-reaching implications and requires the multinational companies to embrace greater transparency in their operations.

In all, this amendment provides a path for-

Enhanced transparency and accountability on the part of certain classes of unlisted companies for being audited by the ministry, other than an external party.
Early intervention by regulators to detect financial irregularities early, allowing timely intervention to mitigate risks.
The amendment aligns to international standards with best practices to promote consistency and enhance credibility of the Indian unlisted companies in the global market.
Tax efficiency on both short-term and long-term capital gains that provides certainty to the investors to engage in long-term investment in unlisted companies.

The Satyam Computer Scam case, which was marked as a massive financial fraud in the corporate world, led the ministry to formulate some strict policies for the purpose of strong regulatory oversight. Since the amendment is designed to prevent such frauds that happened earlier, it will build back the investor’s confidence in the country’s corporate sector.

The system of oversight and enforcement of compliance procedures under the Companies And, 2013 (which is explained in Section 129 of the Act) reinforces financial statements that are precise and transparent. Here is an overview of the procedure for this:-

Preparation of financial statements

An important Section on which corporate law lays emphasis is that all the corporations and subsidiaries of each must prepare annual financial statements, specified in Section 129 in the Act. Such disclosures, which are divided in different statements as balance sheet, profit and loss statement, cash flow, statement of changes in equity should follow the specific rules of accounting standards.

Consolidated financial statements

In case a company has subsidiaries, Section 129(3) mandates it to come up with a consolidated financial statement of each that reports the economic position and cash flow statement of the company as well as the subsidiaries.

Compliance with accounting standards

The company needs to do an assessment of its financial statements first, and then it shall have to comply with the notification of the companies act as per Section 133 which may include Ind AS and other necessities.

Director’s responsibility

The director’s main role is to make sure that the FS are in accordance with the accounting standards enacted by the ICAI under Section 133 and provide an accurate & reliable view of the financial health of the business. For the income statement, and cash flow statements of the company, they must observe that the statements are devoid of any material misstatements or omissions so as to maintain credibility.

Auditor’s role

Auditing statements should be done by the qualified auditor coming from the company and appointed by them. The auditor’s report should be about an opinion on whether the FS are real and fair and also according to the related accounting standards.

Filing of financial statements

Following a satisfactory sanction by the Board of directors and acceptance by the shareholders at the annual general meeting (AGM), companies have to submit their financial statements, certification of their auditor, and other notes to the Registrar of Companies (RoC) with AOC-4 before expiry of the stipulated time frame (30 days from the date of annual general meeting) as per Section 137(1).

Penalty provisions

Being out of compliance with the parts of Section 129 of the Act, including inaccurate or misrepresented FS, may lead to penalty, which is mentioned under Section 129(7). Similarly, the RoC or other regulatory bodies may be responsible for forcing compliance as well as taking legal measures against companies or individuals in the tribunals (NCLTs) that do not follow the rules.

Role of an auditor under Section 129 of the Act is listed as follows:

Auditing Financial Statements

An auditor’s task is examining and auditing the accounting books as well as financial statements of the company whereas the other, the management prepares the accounts and financial statements. It involves assets, liabilities, operating expenses, cash flow, ad owner’s equity accounts, respectively. An auditor makes sure that financial statements have a full depiction of the truth about the company’s profitability and financial position.

Compliance with Legal Requirements and Accounting Standards

The auditor checks that the financial statements are in companies with its own accounting standards and legal provisions. It includes adherence to the Generally Accepted Accounting Principles (GAAP) or the Indian Accounting Standards (Ind AS). An auditor has to examine whether the company adheres to other set legislation and rules surrounding financial reporting as well.

Review of Internal Controls

The auditor gauges the exercise of progress management by the company’s internal controls. Internal controls are the set of procedures and schemes established by the company that prevent tumbling of assets and ensure the legitimacy of financial records. The auditor develops a list of gaps and shortcomings that need remedying and then gives solutions.

Express Opinion on Financial Statements

A review of the auditor’s work is followed by making an opinion about whether the financial reports reflect the true and fair state of the corporation. The auditor’s sanction to the financial statements show the true and complete picture of the firm’s position. Together with checking the statements for compliance with accounting standards, the auditor has to examine the broader picture of the financial statements.

Report on Matters of Adequacy of Internal Financial Controls & CSR Requirements

As per Section 143(3)(i), the auditor evaluates the company’s Internal financial controls and comments on the effectiveness of the report. Also, the auditor reconsiders a company’s compliance with Corporate Social Responsibility (CSR) requirements, as mandated under Section 135(1) of the Companies Act, by reviewing policy and assessing implementation of CSR activities.

Related Party Transactions

The auditor also measures the related party transactions to ensure compliance with applicable laws and regulations. Related party transactions are transactions between the company and its directors, key management personnel or other business persons.

Sign the Audit Report

Auditor has to put down the report signed by their personal name and further include the number of their membership or certification number. An audit firm may require the engagement partners to sign in case of being an auditor. Conducting a thorough review of the company, it is enhanced through the auditing process.

In India, Section 129 of the Companies Act, 2013 states that companies must prepare and present their financial statements which provide a ‘true and fair view’ of the state of affairs of the company. This is in line with the international accounting principles as per the International Financial Reporting Standards (IFRS), which stress the importance of creating financial statements that offer information that is appropriate and reliable to the users.

Here’s how Section 129 aligns with the international accounting principles:-

True and Fair View

The financial statements as per Section 129 of the Companies Act, 2013 should reflect a ‘true and fair’ view of the condition of the company. This aligns with the goal of IFRS to provide financial information that is relevant for making economic decisions and portray the economic substance of transactions.

Compliance with Accounting Standards

Section 129 directs companies to observe the accounting standards notified under Section 133 of the Companies Act 2013 which is consistent with the IFRS. The IFRS is created upon a collection of globally recognised accounting standards that companies can decide to follow uniformity and comparability in reporting.

Consolidated Financial Statements

Also, Section 129(3) is to be compiled by companies having subsidiaries by preparing consolidated financial statements. This is in line with the IFRS enactments that require the preparation of consolidated financial statements when a company has control over one or more other entities.

Disclosure Requirements

Section 129 provides for a number of disclosure requirements in the Boards report, for example, details of loans, guarantees, investments, related party transactions, and corporate social responsibility initiatives. Search disclosure requirements are consistent with the principles of transparency and disclosure in IFRS, that are intended to ensure that users of financial statements receive reliable and relevant information.

In general, Section 129 of the Companies Act, 2013 is consistent with international accounting principles in terms of emphasis on the correct and sincere picture of the financial statements. The same principles are compliant to the International Financial Reporting Standards that are widely accepted by companies all over the world.

A Financial Statement is a vital document that provides critical information of the daily operations in a business. They enable the decisions and communication with the company’s stakeholders in an organised and time-saving way.

The importance of financial statements to a company are the following:-

Financial statements provide the current financial condition of the business in the form of a snapshot taken at a particular time. Thus, such data is beyond doubt invaluable for shareholders, decision makers and financiers of a company.
Lenders and Creditors use financial statements as a basis to assess a company’s creditworthiness, determining how much credit they would be willing to give the business.
Fiscal authorities and regulatory bodies use FS to develop tax policies, regulations, and economic policies, respectively.
A company’s growth prospect can be estimated using financial statements to make a financially sound investment decision.
Stock traders and market analysts who use financial statements to gain insights into a company’s financial performance to guide traders adapt their trading strategies according to the company’s financial position.

Rent Alpha Pvt. Ltd v. RoC, Mumbai (2023)

In this case, the petitioner sought to compound financial statements for three consecutive financial years. The Registrar of Companies, Mumbai confirmed the violation of Section 129(2) of the Companies Act, 2013. The tribunal approved the compounding subject to the payment of specified fines by the applicant. A fine of RS. 50,000 was imposed for these financial years (S. 41) 2018-2019 and Rs. 100,000 for financial years 2019-20 and 2021-21.

Dr. Rajesh Kumar Yaduvanshi v. Serious Fraud Investigation Office (2020)

The case involves a petition filed against summons concerning the SFIO (Serious Fraud Investigation Office) complaint put forward against BSL (Bhushan Steel Limited) for an alleged scam of embezzlement committed by BSL and its promoters. The Delhi High Court found the offences under Sections 128, 129, 448 r/w Section 447 of the Companies Act, 2013. The court, finally, issued a decision to terminate the summoning order since there were not enough grounds to tie the petitioner down to the criminal charges.

Sachin Jain v. Serious Fraud Investigation Officer (2019)

The petitioner in this matter urged the division bench to consider the question of dropping the petitioner’s from the main suit, setting aside the Trial Court’s decision. Through the petition, the debtor pressured the employer by filing a suit against a company and its directors, who, including the plaintiff, prayed for a repayment of loan amount. The litigation accountability imposed on the individuals as well as the possibility of personal liability, as a result of their acting capacity and the potential lifting of corporate veil. Eventually, the court approved the petition, struck out the Trial Court’s decision, and cleared the petitioners’ suit. It excluded the situation of directors being forced to take personal responsibility for the company’s issues without due proof or allegations against them by the plaintiff.

Overall, a financial statement is a company’s communication tool that clearly shows all the necessary information to make informed decisions about a company’s performance, solvency, and outlook. It is a vital instrument that the management, investors, creditors, and other stakeholders assemble as a necessary tool to make the right financial decision. It also implicates strategic decision-making, best credit extension policy and formation of appropriate rules and regulations.

Why does a company require a financial statement?

Financial statements are required in any financial institution or business to streamline the financial process relating to the prospects of evaluation of investors, market, shares, and creditors. It also helps to investigate any fraudulent practices in the organisation.

When does a company need to file a consolidated financial statement?

According to Section 129(3) of the Companies Act 2013, any company, having one or more subsidiaries, needs to file a consolidated financial statement holding all the financial details of the companies, along with the standalone financial statements of the parent company.

Do unlisted companies have to make financial statements under the new amendment?

Unlisted companies are required to make only annual financial statements. However, after the Companies (Amendment) Act 2020, some class of unlisted companies need to prepare financial statements periodically like that of the listed companies.

Do the Registrar of Companies require to scrutinise consolidated financial statements?

Yes, the registrar of companies (RoC) is required to scrutinise the consolidated financial statements, along with the standalone financial statements of a company according to Section 137 of the Act after 30 days of the end of the AGM.

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Section 129 of Companies Act, 2013

Clause-wise Explanation of Section 129 of Companies Act, 2013