How to Write a Director’s Report That Complies with the Law

Director’s Report: An Essential Document for Corporate Governance and Regulatory Compliance

The Director’s Report is an important document that provides an overview of a company’s workings, activities, and performance over a specific period. It is an essential part of corporate governance and regulatory compliance under the Companies Act, 2013.

This guide elaborates on the intricate aspects of the Director’s Report, its importance, and the mandatory legal provisions related to it. We will also discuss how to write a Director’s Report that is both informative and compliant with the law.

Why is the Director’s Report Important?

The Director’s Report is essential for several reasons. First, it provides shareholders with an overview of the company’s performance. This information is essential for shareholders to make informed decisions about their investments.

Second, the Director’s Report helps to ensure that the company is complying with the law. The report must include information on a variety of topics, including the company’s financial performance, its corporate governance practices, and its compliance with environmental regulations.

Third, the Director’s Report can help to protect the company from liability. If the company is not complying with the law, the report can help to identify potential problems and take corrective action.

How to Write a Director’s Report

The Director’s Report should be written clearly and concisely. The information should be presented in a way that is easy for shareholders to understand. The report should also be accurate and complete.

The following tips can help you to write a Director’s Report that is both informative and compliant with the law:

• Start by brainstorming the key topics that you need to cover in the report.
• Logically organize the information.
• Use clear and concise language.
• Proofread the report carefully before you file it with the Registrar of Companies.

The Companies Act, 2013, sets out the requirements for the Director’s Report. The following sections of the Act are particularly relevant:

• Section 134: This section sets out the general requirements for the Director’s Report. It includes information on the company’s financial performance, its corporate governance practices, and its compliance with environmental regulations.
• Section 92: This section requires the Director’s Report to include an extract of the annual return. The annual return is a document that provides information on the company’s shareholders, directors, and financial position.
• Section 143: This section requires the Director’s Report to include a statement by the auditor on the company’s financial statements. The auditor’s statement provides an opinion on whether the financial statements are prepared by the law and are a true and fair reflection of the company’s financial position.
• Section 149: This section requires the Director’s Report to include a statement by the independent directors on their independence. The independent directors are responsible for providing independent oversight of the company’s management.
• Section 178: This section requires the Director’s Report to include information on the company’s policy on directors’ remuneration. 
• Section 186: This section requires the Director’s Report to include information on the company’s loans, guarantees, and investments. 
• Section 188: This section requires the Director’s Report to include information on the company’s related party transactions. Related party transactions are transactions between the company and its related parties. 

The Companies (Accounts) Rules, 2014, also set out additional requirements for the Director’s Report. These rules are amended from time to time, so it is essential to check the latest version.

By referring to these sections of the Companies Act, 2013, and the Companies (Accounts) Rules, 2014, you can ensure that your Director’s Report is compliant with the law.

Director’s Report: What It Includes 

1. Financial summary or highlights/Performance of the Company during the reporting period

2. Brief description of the Company’s working during the year/State of Company’s affairs and Change in the nature of business, if any

3. Details in respect of adequacy of internal financial controls concerning the Financial Statements.

4. Declaration of Dividend during the reporting period

5. Transfer of profit to Reserves during the reporting period

6. Change of Name /Registered office during the reporting period

7. Issue of Shares with/without Differential Rights during the reporting period

8. Increase in Authorized Share Capital during the reporting period

9. Issue of Sweat Equity Share during the reporting period

10. Details of Directors and Key Managerial Personnel & change during the reporting period

11. Particulars of contracts or arrangements with related parties should be in the AOC-2 format.

12. Particulars of Employees as Per Rule 5 of The Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014

13. A declaration that the company has complied with applicable secretarial standards

14. A statement indicating how formal annual evaluation has been made by the Board of its performance and that of its committees and individual directors. 

15. Declaration by an Independent Director(s) and re-appointment, if any –

16. Statement regarding the opinion of the board about integrity, expertise and experience (including the proficiency) of the independent directors appointed during the year

17. Disclosure of companies that have become or ceased to be its subsidiaries, joint ventures or associate companies during the year

18. Auditors details 

19. Details About Auditors’ Report 

20. Disclosure of Cost Audit

21. Secretarial Audit Report should be attached in MR-3 format

22. Revelation about Internal Audit & Controls 

23. Vigil Mechanism compliance

24. Risk management policy disclosure 

25. Audit Committee details 

26. Material changes and commitments, if any, affecting the financial position of the company  which have occurred between the end of the financial year of the company to which the financial statements relate and the date of the report

27. Details of significant and material orders passed by the regulators or courts or tribunals  impacting the going concern status and the company’s operations in future

28. Disclosure of Deposits 

29. Particulars of loans, guarantees or investments under section 186 during the year

30. Obligation Of Company Under The Sexual Harassment Of Women At Workplace (Prevention, Prohibition And Redressal) Act, 2013

31. Conservation of energy, technology absorption and foreign exchange earnings and outgo during the reporting period

32. Foreign exchange earnings and Outgo during the reporting period

33. Directors’ Responsibility Statement referred to in clause (c) of sub-section (3) of Section 134 of the Companies Act, 2013

34. Transfer of Amounts to Investor Education and Protection Fund 

35. details existing in respect of frauds to be reported by auditors under sub-section (12) of section 143 other than those which are reportable to the Central Government

36. Report on highlights on the performance of subsidiaries, associates and joint venture companies and their contribution to the overall performance of the companies during the period under report

37. Disclosure of Companies covered under section 178(1) on directors’ appointment and remuneration including other matters provided under section 178(3)

38. The details of application made or any proceeding pending under the insolvency and bankruptcy code, 2016 (31 of 2016) during the year along with their status as at the end of the financial year.-

39. The details of the difference between the amount of the valuation done at the time of one-time settlement and the valuation done while taking a loan from the banks or financial institutions along with the reasons thereof. 

Conclusion:

The Director’s Report is a legal requirement for all companies incorporated under the Companies Act, 2013. It serves as a vital tool for stakeholders to understand the company’s performance, strategic direction, and compliance status. The report must include a comprehensive overview of the company’s financial performance, as well as its key business risks and opportunities. It should also discuss the company’s compliance with all applicable laws and regulations. The preparation and compliance with the Director’s Report can be challenging, but it is essential for any company that wants to ensure its stakeholders have a clear understanding of its operations. Failure to comply with the requirements of the report can carry significant legal implications and may adversely affect the company’s reputation.

Also Read: Auditor Appointment in Board Meeting, Annual General Meeting and in Casual Vacancy.