Introduction

The Directors’ Report is one of the most significant statutory reports prepared by the Board of Directors of a company. It serves as a communication bridge between the Board and the shareholders by providing insights into the company’s financial performance, operational highlights, governance practices, risks, corporate social responsibility initiatives, and future outlook.

Under the Companies Act, 2013, every company is required to prepare a Directors’ Report in accordance with Section 134 read with the applicable Rules. The report must be approved by the Board and signed by the Chairperson authorized by the Board or by two directors, one of whom shall be the Managing Director, where applicable. AOC-1, AOC-2 and annual report on CSR activities, if applicable as part of Directors report shall also be signed separately by two directors, one of whom shall be the Managing Director, where applicable.

This article discusses the legal framework governing the Directors’ Report with particular emphasis on Form AOC-1, Form AOC-2, and Corporate Social Responsibility (CSR) disclosures.

Major Contents of Directors’ Report

(i) A Directors’ Report includes:

• Financial Highlights – In case a company has subsidiaries, associates or joint ventures, Consolidated Financial Statement (CFS) are required to be prepared and hence Director’s report should mention such fact of consolidation.
• State of Company’s Affairs
• Disclosure on change in the nature of business
• Dividend Recommendation
• Transfer to Reserves
• Material Changes after Balance Sheet Date
• Share Capital
• Deposits
• Particulars of Loans, Guarantees and Investments
• Internal Financial Controls
• Risk Management
• Directors and Key Managerial Personnel
• Board Meetings
• Directors’ Responsibility Statement
• Auditors’ Report and Secretarial Audit
• Disclosure Under the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013.
• Compliance Under the Maternity Benefit Act, 1961
• Energy Conservation and Foreign Exchange earnings and outgo
• Subsidiaries, Associates and Joint Ventures
• Weblink of Annual Return, if the company has functional website
• Other statutory disclosures.

(ii) AOC-1 – Statement Containing Salient Features of subsidiaries, associates or joint ventures

Legal Provision

Section 129(3) requires every company having subsidiaries, associates or joint ventures to prepare Consolidated Financial Statements (CFS).

Rule 5 of the Companies (Accounts) Rules, 2014 prescribes Form AOC-1.

Purpose of AOC-1

AOC-1 provides summarized financial information of:

• Subsidiaries – As per Section 2(87) of the Companies Act, 2013, a subsidiary company is a company in which another company (known as the holding company):

1. Controls the composition of the Board of Directors; or
2. Exercises or controls more than one-half of the total voting power, either by itself or together with one or more of its subsidiary companies.

• Associate Companies – Under Section 2(6) of the Companies Act, 2013, an associate company is a company in which another company has significant influence, but which is not its subsidiary. Significant influence means:

1. Control of at least 20% of the total voting power; or
2. Control of or participation in business decisions under an agreement.

• Joint Ventures – A joint venture is a business arrangement where two or more parties jointly undertake an economic activity and have joint control over the entity through a contractual agreement. Decisions relating to the relevant activities require the unanimous consent of the parties sharing control.

Joint ventures are generally formed for a specific business project, investment or commercial objective, with each venturer sharing the risks, rewards and management of the venture as agreed. Limited liability partnerships (LLPs)cannot be subsidiary or associate even if they fulfill the voting power criteria.

Information that are to be disclosed in AOC-1 covers the % holding along with the entity turnover, assets, liabilities, profit before tax, Investments, Net worth and others.

(iii) AOC-2 – Disclosure of Related Party Transactions

Legal Provision

Section 134(3)(h)

Read with:

• Section 188
• Rule 8(2) of Companies (Accounts) Rules, 2014

Related Parties include

• Directors or his relative
• Key Managerial Personnel or his relative
• Relatives of directors
• Public company in which director is a director or holds along with relative more than 2%
• Firms in director or his relative is a partner
• Private companies in which director or his relative is a member or director with common directors or

Transactions covered

• Sale or purchase of goods
• Rendering of services
• Leasing property
• Appointment to office of profit
• Underwriting
• Purchase or sale of assets

AOC 2 should disclose

• Name of related party
• Nature of relationship
• Nature of transaction
• Duration
• Value of transaction
• Amount paid/received
• Justification
• Date of Board approval

AOC-2 is applicable only if:

• Transactions are not at arm’s length; nor in ordinary course of business.

(iv) Annual report on Corporate Social Responsibility (CSR)

Legal Provision

CSR is governed by:

Section 135 of the Companies Act, 2013 and the Companies (CSR Policy) Rules, 2014.

Applicability

CSR provisions apply if a company satisfies any one of the following during the immediately preceding financial year:

• Net worth of ₹500 crore or more; or
• Turnover of ₹1,000 crore or more; or
• Net profit of ₹5 crore or more.

CSR Committee

consists of:

• Three or more directors
• At least one Independent Director (where applicable)

Companies having CSR spend of less than Rs 50 lacs annually need not constitute CSR Committee.

CSR Spending

Eligible companies are required to spend at least 2% of the average net profits of the three immediately preceding financial years on eligible CSR activities specified in Schedule VII of the Act.

The Annual Report on CSR generally contains the following disclosures:

• Brief outline of CSR Policy
• Composition of CSR Committee (where applicable)
• Average net profit
• Prescribed CSR obligation
• Amount spent during the year
• Amount unspent
• Reasons for unspent amount (if applicable)
• Ongoing projects
• CSR impact assessment-applicable in case of average CSR obligation of ₹10 crore or more in the three immediately preceding financial years; and completed CSR projects having spending of ₹1 crore or more,
• Web-link to CSR Policy and approved projects

Penalties for Non-Compliance

Rs 300,000 lacs on the company and Rs 50,000 on every officer in default.

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