Business compliance keeping you awake?
Cleartax's wide range of compliance services is here for you
Explore Now

Draft Format of Directors’ Report

By Mayashree Acharya

|

Updated on: Dec 28th, 2021

|

11 min read

social iconssocial iconssocial iconssocial icons

Financial reporting is necessary for companies as it provides details of the state of a company and its compliance with financial, corporate social responsibility and accounting standards. Public and private limited companies must file a financial document called the directors’ report at the end of the financial year. The directors’ report is the report prepared by the Board of Directors of the company and should be attached to every financial statement. It outlines the financial state of the company.

Applicability of the Directors’ Report

All companies need to prepare the directors’ report, except One Person Company (OPC) and small companies. The small companies and OPCs need to file the abridged directors’ report as per Rule 8A of the Companies (Accounts) Amendment Rules, 2018.

Purpose of the Director’s Report

Under Section 134(3) of the Companies Act, 2013, the directors of a company must prepare the directors’ report at the end of each financial year. The boards’ report or the directors’ report ensures greater corporate transparency. The shareholders can make informed decisions through the directors’ report’s information. The information provided in the directors’ report helps shareholders to understand:

  • Whether the company can grow and expand
  • Whether the finances of the company are in good health
  • How the company is performing within its market and how the market is performing in general
  • Whether the company is complying with accounting standards, financial regulations, and corporate social responsibility requirements

Contents of a Director’s Report

Section 134(3) of the Companies Act, 2013 and Rule 8 of the Companies (Accounts) Rules, 2014 provides the information that needs to be provided in the directors’ report. The listed companies must add additional disclosures provided under Rule 5 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, in their directors’ report.

Contents of a Directors’ Report as per Companies Act, 2013

According to Section 134(3) of the Companies Act, 2013 (‘Act’), the board’s report should include the following information: 

  • The annual return extract as provided under Section 92(3) of the Act
  • Number of board meetings 
  • Directors’ responsibility statement as prescribed under Section 134(5) of the Act
  • Details regarding frauds reported by auditors under Section 143(12) of the Act other than those reportable to the Central Government
  • Statement of the declaration provided by independent directors under Section 149(6) of the Act
  • Comments or explanations by the board on every reservation, qualification, or adverse disclaimer or remark made by the auditor in their report and by the company secretary in practice in their secretarial audit report 
  • Particulars of guarantees, loans or investments made under Section 186 of the Act
  • Particulars of arrangements or contracts with related parties as prescribed under Section 188(1) of the Act 
  • The state of the company’s affairs 
  • The amounts that the company proposes to carry to any reserves if any
  • The amount that the company recommends should be paid by way of dividend if any 
  • Material commitments and changes affecting the financial position of the company occurred between the end of the financial year to which the financial statements relate and the date of the report if any
  • The conservation of technology absorption, energy, outgo and foreign exchange earnings, in the manner provided in Rule 8(3) of the Companies (Accounts) Rules, 2014
  • A statement indicating implementation and development of a risk management policy including identification of risk elements, which, in the boards’ opinion, may threaten the company existence, if any 
  • The details about the policy implemented and developed by the company on Corporate Social Responsibility (CSR) initiatives undertaken during the year
  • A statement indicating how the board has made the formal annual evaluation of its own performance, its committees and individual directors in the case of listed companies and every other public company having paid-up share capital of Rs.25 crore or more calculated at the end of the previous financial year
  • Such other matters as may be prescribed

Contents of a Directors’ Report as per Companies (Accounts) Rules, 2014

Rule 8 of the Companies (Accounts) Rules, 2014, provides that the board’s report should include the following information: 

  • The directors must prepare the board’s report on the basis of stand-alone financial statements of the company
  • The directors’ report must contain a separate section where a report on the financial position and performance of all associates, subsidiaries, and joint venture companies included in the consolidated financial statements is presented. 
  • The following are the details relating to the conservation of energy:
    • The impact or steps taken on the conservation of energy 
    • The steps taken for the usage of alternate sources of energy  
    • The capital investment in energy conservation equipment
    • Contents of boards’ report as per Companies Act, 2013 
  • The following are the details relating to technology absorption: 
    • The efforts made towards technology absorption
    • The benefits derived like cost reduction, product development, product improvement, or import substitution
    • In the case of imported technology, i.e. imported during the previous three years, details of technology imported, year of import, whether the technology has been fully absorbed and the areas and reasons where absorption has not taken place
    • The expenditure incurred on research and development 
  • The earned foreign exchange in terms of actual inflows during the year 
  • The outgo foreign exchange during the year in terms of actual outflows 
  • The financial highlights or summary 
  • Any changes in the nature of business
  • The details of key managerial personnel or directors who were appointed or resigned during the year
  • The names of companies that have ceased or become its joint ventures,  subsidiaries, or associate companies during the year
  • The following details relating to: 
    • Deposits accepted during the year
    • Unpaid deposits or unclaimed deposits at the end of the year 
    • Default in payment or repayment of deposits or payment of interest during the year, number of such default and the total amount involved at the beginning of the year, maximum during the year and at the end of the year 
  • Details of deposits that are not in compliance with the requirements of Chapter V of the Act
  • The details of material and significant orders passed by the regulators, tribunals or courts impacting the company’s operations in future and going concern status 
  • The details regarding the adequacy of internal financial controls concerning the financial statements

Additional Contents of a Directors’ Report for Listing Companies 

Section 197(12) of the Companies Act, 2013, prescribes that the listed companies should disclose the remuneration ratio of all directors to the median employee‘s remuneration and such other details in the board‘s report.

According to Rule 5 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, the board’s report should include the following information: 

  • The increase in the percentage of the remuneration of each chief financial officer, director, chief executive officer, manager, or company secretary in the financial year, if any
  • The increase in the percentage in the median remuneration of the employees in the financial year
  • The number of permanent employees on the rolls of the company
  • The explanation on the relationship between company performance and an average increase in remuneration 
  • Comparison of the remuneration of the KMP (Key Managerial Personnel) against the performance of the company
  • Variations in the company’s market capitalisation and price-earnings ratio  as on the closing date of the current financial year and previous financial year
  • Average percentile increase made in the employees’ salaries other than the managerial personnel in the previous financial year 
  • The key parameters for variable components of remuneration availed by the directors
  • The remuneration ratio of the highest paid director to that of the employees who are not directors but receive remuneration above the highest paid director during the year
  • Affirmation that the remuneration is according to the remuneration policy of the company 
  • A statement consisting the name of every employee of the company indicating the following:
    • Designation of the employee
    • Remuneration 
    • Nature of employment, whether contractual or otherwise
    • Experience and qualifications of the employee
    • Date of commencement of employment
    • Age of the employee
    • The last employment held by the employee before joining the company
    • The equity shares percentage held by the employee in the company 
    • Whether such employee is a relative of manager or director of the company and name of such manager or director 

Penalty for not Preparing the Directors’ Report

The board’s report or Directors’ report and its annexures should be signed by the company’s chairperson when the board authorises them. When the board does not authorise the company’s chairperson for signing the report, at least two directors should sign the report, one of whom must be a managing director. A signed copy of the directors’ report should be circulated, issued or published on the company website. 

When a company defaults in the preparation of the board’s report and directors’ report, the company has to pay a penalty of Rs.3 lakh, and every officer of the company in default has to pay a penalty of Rs.50,000.

Disclaimer: The materials provided herein are solely for information purposes. No attorney-client relationship is created when you access or use the site or the materials. The information presented on this site does not constitute legal or professional advice and should not be relied upon for such purposes or used as a substitute for legal advice from an attorney licensed in your state.

inline CTA
Get an expert at affordable price
For ITR, GST returns, Company Registration, Trademark Registration, GST Registration
About the Author

I am an advocate by profession and have a keen interest in writing. I write articles in various categories, from legal, business, personal finance, and investments to government schemes. I put words in a simplified manner and write easy-to-understand articles. Read more

CONTENTS

Clear offers taxation & financial solutions to individuals, businesses, organizations & chartered accountants in India. Clear serves 1.5+ Million happy customers, 20000+ CAs & tax experts & 10000+ businesses across India.

Efiling Income Tax Returns(ITR) is made easy with Clear platform. Just upload your form 16, claim your deductions and get your acknowledgment number online. You can efile income tax return on your income from salary, house property, capital gains, business & profession and income from other sources. Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing.

CAs, experts and businesses can get GST ready with Clear GST software & certification course. Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner. Our Goods & Services Tax course includes tutorial videos, guides and expert assistance to help you in mastering Goods and Services Tax. Clear can also help you in getting your business registered for Goods & Services Tax Law.

Save taxes with Clear by investing in tax saving mutual funds (ELSS) online. Our experts suggest the best funds and you can get high returns by investing directly or through SIP. Download Black by ClearTax App to file returns from your mobile phone.

Cleartax is a product by Defmacro Software Pvt. Ltd.

Company PolicyTerms of use

ISO

ISO 27001

Data Center

SSL

SSL Certified Site

128-bit encryption