Books of Account and Financial Statements

The first proviso: keeping them elsewhere. All or any of the books may be kept at such other place in India as the Board of Directors may decide, and where such a decision is taken the company shall, within seven days, file with the Registrar a notice in writing giving the full address of that other place.

Note it is the Board's decision, it must be in India, and the Registrar must be told within seven days.

The second proviso allows the books to be kept in electronic mode in the prescribed manner.

Section 128(2): branches. Where a company has a branch in India or outside India, it is deemed to have complied with sub-section (1) if proper books relating to the branch's transactions are kept at that office and proper summarised returns are sent periodically to the registered office or the other place.

Section 128(3): a director's right of inspection. The books and papers maintained within India shall be open for inspection at the registered office or the other place in India by any director during business hours; and where financial information is maintained outside the country, copies shall be maintained and produced for inspection by any director, subject to prescribed conditions.

The proviso: inspection in respect of any subsidiary shall be done only by the person authorised by a resolution of the Board of Directors. So a director's personal right stops at his own company; going into a subsidiary's books needs a Board authority.

Section 128(4): cooperation. The officers and other employees shall give the person making the inspection all assistance which the company may reasonably be expected to give.

Section 128(5): eight years. The books relating to a period of not less than eight financial years immediately preceding a financial year, or, where the company has existed for less than eight years, all the preceding years, together with the vouchers relevant to any entry, shall be kept in good order.

The proviso: where an investigation has been ordered under Chapter XIV, the Central Government may direct that the books be kept for a longer period.

Section 128(6): who is punished. If the managing director, the whole-time director in charge of finance, the Chief Financial Officer, or any other person charged by the Board with the duty of complying with this section contravenes it, that person shall be punishable with a fine of not less than fifty thousand rupees and up to five lakh rupees.

The liability is targeted, not general. It falls on the named officers or on the person the Board charged with the duty, not on every director.

Financial statements: section 129

Section 129(1): the standard. The financial statements shall:

• give a true and fair view of the state of affairs of the company or companies;
• comply with the accounting standards notified under section 133; and
• be in the form or forms provided for different classes of companies in Schedule III.

The first proviso: the items shall be in accordance with the accounting standards.

The second proviso: who is outside. The sub-section does not apply to any insurance or banking company, or any company engaged in the generation or supply of electricity, or any other class of company for which a form of financial statement has been specified in or under the Act governing it. Those industries have their own statutory formats.

The third proviso: true and fair, sector by sector. The statements shall not be treated as not disclosing a true and fair view merely because they do not disclose:

• (a) for an insurance company, matters not required by the Insurance Act 1938 or the Insurance Regulatory and Development Authority Act 1999;
• (b) for a banking company, matters not required by the Banking Regulation Act 1949;
• (c) for a company generating or supplying electricity, matters not required by the Electricity Act 2003;
• (d) for a company governed by any other law, matters not required by that law.

Section 129(2): laying them. At every annual general meeting the Board shall lay before the meeting the financial statements for the financial year. This is one of the four items of ordinary business under section 102(2)(a).

Section 129(3): consolidation. Where a company has one or more subsidiaries or associate companies, it shall, in addition to its own statements, prepare a consolidated financial statement of the company and of all the subsidiaries and associate companies, in the same form and manner and in accordance with the applicable accounting standards, and lay it before the annual general meeting along with its own.

The first proviso: it shall also attach a separate statement containing the salient features of the financial statement of each subsidiary and associate in the prescribed form.

The second proviso lets the Central Government provide for consolidation in the prescribed manner.

Note that associates are consolidated too, not only subsidiaries. That is why section 2(6) matters: the twenty per cent significant influence test decides who comes into the consolidated accounts.

Periodical results for unlisted companies: section 129A

The Central Government may require such class or classes of unlisted companies as may be prescribed:

• (a) to prepare the financial results on such periodical basis and in such form as may be prescribed;
• (b) to obtain the approval of the Board and complete an audit or limited review of those periodical results in the prescribed manner; and
• (c) to file a copy with the Registrar within thirty days of completion of the relevant period, with the prescribed fees.

This section extends something like the listed company's quarterly reporting discipline to large unlisted companies, and it is entirely delegated to the rules.

Re-opening accounts: section 130

Section 130(1): when accounts may be re-opened. A company shall not re-open its books of account and not recast its financial statements unless:

• an application is made by the Central Government, the Income-tax authorities, the Securities and Exchange Board, any other statutory regulatory body or authority, or any person concerned; and
• an order is made by a court of competent jurisdiction or the Tribunal to the effect that:
• (i) the relevant earlier accounts were prepared in a fraudulent manner; or
• (ii) the affairs of the company were mismanaged during the relevant period, casting a doubt on the reliability of financial statements.

The proviso: the court or Tribunal shall give notice to the Central Government, the Income-tax authorities, SEBI, any other statutory regulatory body or authority concerned, or any other person concerned, and shall take their representations into consideration before passing any order.

Section 130(2). The accounts so revised or recast shall be final.

Section 130(3): the eight year limit. No order shall be made in respect of re-opening books relating to a period earlier than eight financial years immediately preceding the current financial year.

The proviso extends that where the Central Government has directed under the proviso to section 128(5) that books be kept longer: the books may be ordered to be re-opened within such longer period.

Note how sections 128(5) and 130(3) lock together. Books must be kept for eight years, and accounts cannot be re-opened beyond eight years. The retention period and the re-opening window are deliberately the same.

Voluntary revision: section 131

Section 131(1). If it appears to the directors that (a) the financial statement or (b) the report of the Board do not comply with section 129 or section 134, they may prepare a revised financial statement or a revised report in respect of any of the three preceding financial years, after obtaining the approval of the Tribunal on an application by the company in the prescribed form and manner, and a copy of the Tribunal's order shall be filed with the Registrar.

Three provisos.

The Tribunal shall give notice to the Central Government and the Income-tax authorities and take their representations into consideration.

Such a revised statement or report shall not be prepared or filed more than once in a financial year.

The detailed reasons for the revision shall be disclosed in the Board's report of the year in which the revision is made.

Compare sections 130 and 131 carefully. Section 130 is imposed: an outside applicant, a court or Tribunal order, grounds of fraud or mismanagement, up to eight years back, and the result is final. Section 131 is voluntary: the directors move, the Tribunal approves, the ground is non-compliance with section 129 or 134, the reach is three preceding financial years, and it may be done once a financial year with reasons disclosed.

Filing: section 137

A copy of the financial statements, including the consolidated financial statement, duly adopted at the annual general meeting, shall be filed with the Registrar within thirty days of the meeting, with the prescribed fees. Where the statements are not adopted, they are filed as unadopted within thirty days and the adopted ones later; and where no annual general meeting is held, they are filed within thirty days of the last date on which it should have been held, with the reasons.

Contrast the two filing periods. The annual return goes within sixty days of the annual general meeting under section 92(4); the financial statements within thirty days under section 137.

A worked example

Aurangabad Pharma Limited has a financial year ending 31 March 2028, one subsidiary and one associate company.

The books. They are kept at the registered office, on the accrual basis and by double entry, giving a true and fair view including of its Nashik branch, and explaining the transactions at both places.

Moving them. The Board resolves to keep the books at the Nashik plant instead. That is permitted, it being a place in India decided by the Board, and the company must file a notice with the Registrar giving the full address within seven days: first proviso to section 128(1).

A director asks to see them. Any director may inspect during business hours at the registered office or that other place, and the officers and employees must give all assistance the company may reasonably be expected to give. But when he asks to inspect the subsidiary's books, he needs to be authorised by a Board resolution: proviso to section 128(3).

Retention. The books, with the vouchers relevant to any entry, must be kept in good order for not less than eight financial years preceding the current one: section 128(5). If an investigation is ordered under Chapter XIV, the Central Government may direct a longer period.

Who is liable. If the books are not kept properly, the managing director, the whole-time director in charge of finance, the Chief Financial Officer or the person charged by the Board with the duty faces fifty thousand to five lakh rupees: section 128(6).

The statements. They must give a true and fair view, comply with the accounting standards notified under section 133 and be in Schedule III form. Because the company has a subsidiary and an associate, it must also prepare consolidated financial statements of itself, the subsidiary and the associate, and lay both before the annual general meeting, attaching a separate statement of the salient features of each of theirs: section 129(3).

A different company. Had it been a banking company, section 129(1) would not apply to it, and its accounts would follow the format under the Banking Regulation Act 1949, and by the third proviso they would not fail the true and fair test merely for omitting what that Act does not require.

Filing. The statements adopted at the annual general meeting on 10 September 2028 are filed with the Registrar within thirty days, by 10 October 2028, while the annual return has sixty days.

Fraud emerges. In 2031 SEBI finds that the 2026 accounts were prepared in a fraudulent manner. It applies under section 130 to the Tribunal, which gives notice to the Central Government, the Income-tax authorities, SEBI and any other authority or person concerned, considers their representations, and orders the accounts re-opened and recast. The recast accounts are final. The 2026 accounts are within eight financial years of the current one, so the order is competent; accounts of 2018 would not be, unless the Central Government had directed longer retention under section 128(5).

A different problem. In 2029 the directors themselves notice that the 2028 Board's report did not comply with section 134. They may prepare a revised report for any of the three preceding financial years, after the Tribunal's approval on the company's application, with notice to the Central Government and the Income-tax authorities. They may do this only once in a financial year, must file the Tribunal's order with the Registrar, and must disclose the detailed reasons in the Board's report for the year of revision.

Distinctions that carry marks

What this does NOT mean

It does not mean books must always be at the registered office. The Board may decide on another place in India, on notice to the Registrar within seven days.

It does not mean a director may inspect anything he likes. His right under section 128(3) is to his own company's books; a subsidiary's require Board authorisation.

It does not mean only subsidiaries are consolidated. Associate companies are consolidated too under section 129(3).

It does not mean the directors can simply redo the accounts. Section 131 needs the Tribunal's approval, reaches back only three years, and may be used once a financial year.

Quick revision

• 128(1): books and financial statements at the registered office, true and fair view including branches, accrual basis, double entry. Provisos: another place in India on a Board decision with seven days' notice to the Registrar; electronic mode permitted.
• 128(2): branches complied with if proper books are kept there and summarised returns sent periodically. 128(3): inspection by any director during business hours; a subsidiary's books only by a person authorised by Board resolution. 128(4): officers and employees to give all reasonable assistance.
• 128(5): keep eight financial years' books with vouchers in good order; longer if the Central Government so directs on a Chapter XIV investigation. 128(6): MD, whole-time director in charge of finance, CFO or the person charged by the Board, fifty thousand to five lakh rupees.
• 129(1): true and fair view, accounting standards under section 133, Schedule III form. Insurance, banking and electricity companies, and others with their own statutory formats, are outside, and do not fail the true and fair test merely for omitting what their own Acts do not require.
• 129(2): the Board lays the statements at every AGM. 129(3): consolidated statements where there are subsidiaries or associates, laid with the company's own, plus a statement of salient features of each.
• 129A: the Central Government may require prescribed unlisted companies to prepare periodical financial results, have them approved by the Board and audited or reviewed, and file within thirty days.
• 130: re-opening only on an application by the Central Government, Income-tax authorities, SEBI, another statutory authority or any person concerned, and an order of a court or the Tribunal, on grounds of fraud or mismanagement; notice to those authorities; the recast accounts are final; not beyond eight financial years.
• 131: voluntary revision by the directors of the financial statement or Board's report for any of the three preceding financial years, with the Tribunal's approval, notice to the Central Government and Income-tax authorities, once a financial year, reasons disclosed in the Board's report, order filed with the Registrar.

Test yourself

1. Where must books of account be kept, and on what basis? At the registered office, on the accrual basis and according to the double entry system, giving a true and fair view including of branch offices: section 128(1). They may be kept at another place in India if the Board so decides, on filing a notice of the full address with the Registrar within seven days.

2. For how long must books be preserved? For not less than eight financial years immediately preceding a financial year, or for all preceding years where the company has existed for less, together with the vouchers relevant to any entry: section 128(5). The Central Government may direct a longer period where an investigation has been ordered under Chapter XIV.

3. Can a director inspect the books of a subsidiary? Only if he is the person authorised in that behalf by a resolution of the Board of Directors: proviso to section 128(3). His own right of inspection under section 128(3) extends to his own company's books.

4. When must consolidated financial statements be prepared? Where a company has one or more subsidiaries or associate companies. They must be in the same form and manner and in accordance with the applicable accounting standards, laid before the annual general meeting with the company's own statements, and accompanied by a separate statement of the salient features of each subsidiary's and associate's statements: section 129(3).

5. On what grounds and at whose instance may accounts be re-opened? On the application of the Central Government, the Income-tax authorities, SEBI, any other statutory regulatory body or authority, or any person concerned, and on an order of a court of competent jurisdiction or the Tribunal that the earlier accounts were prepared in a fraudulent manner or that the affairs were mismanaged, casting doubt on the reliability of the statements: section 130(1). No order may reach back beyond eight financial years.

6. How does voluntary revision differ? Under section 131 the directors themselves may prepare a revised financial statement or Board's report for any of the three preceding financial years, where these do not comply with section 129 or section 134, with the Tribunal's approval, after notice to the Central Government and the Income-tax authorities. It may be done only once in a financial year, the order is filed with the Registrar, and the detailed reasons must be disclosed in that year's Board's report.