Can bonus shares be issued by capitalising revaluation reserves?

Position under the Companies Act,1956-Unlisted company could issue bonus shares by capitalising revaluation reserve in view of SC's ruling in Bhagwati Developers case
The proviso to sub-section (3) of section 205 of the 1956 Act permitted capitalization of profits or reserve of a company for the purpose of issuing fully paid up bonus shares or paying up any amount for the time being unpaid on any shares held by the members of the company. Thus, the 1956 Act specifically permitted utilization of reserve arising from revaluation of assets for purpose of issuing fully paid up bonus shares. In view of the aforesaid proviso, a company can issue bonus shares by capitalization of revaluation reserve if the Articles of Association of the company so permits.-Bhagwati Developers v. Peerless General Finance & Investment Co. [2005] 62 SCL 574 (SC). In the above case, Supreme Court was concerned with an
unlisted company. In case of listed companies, the SEBI (ICDR) Regulations, 2009 prohibits issue of bonus shares by capitalization of revaluation reserves. The SEBI (ICDR) Regulations is not applicable
to unlisted companies. Thus, under the 1956 Act, an unlisted company could use revaluation reserve for issuing bonus shares.

Section 63 of the Companies Act,2013 bars all companies from capitalising revaluation reserve to issue bonus shares
In order to overcome Supreme Court’s decision in Bhagwati Developers (supra), proviso to section 63(1) of the Companies Act,2013 provides that no issue of bonus shares shall be made by capitalizing reserves created by the revaluation of assets. This bar on issuing bonus shares out of revaluation reserves applies to all companies whether listed or unlisted.

The provisions of section 63 have been enforced with effect from 01-04-2014. Therefore, with effect from 01-04-2014, no company whether listed or unlisted can issue bonus shares by capitalising revaluation reserves

Duty of auditor where bonus shares issued by capitalising revaluation reserve

Apart from proviso to section 63(1) of the 2013 Act forbidding issue of bonus shares by capitalising revaluation reserves, ICAI's Guidance Note on Availability of Revaluation  Reserve for Issue of Bonus Shares also recommends against the same. According to the Guidance Note, revaluation reserve does not represent a realized gain. It is created as a result of a book adjustment only. It does not result from an arm’s length transaction. Since revaluation reserve does not represent a realized gain, it cannot be used for issue of bonus shares/to increase amount paid-up on equity shares. If company uses revaluation reserve for issue of bonus shares/to increase amount paid-up on equity shares , auditor will have to qualify its report. 

The statutory auditor should qualify his audit report if company issues bonus shares on or after 01-04-2014 capitalising its revaluation reserves in contravention of section 63 of the 2013 Act. An illustrative qualification is as under:

Basis for qualified opinionThe company has issued bonus shares for Rs…………(……equity shares of Rs……….each)by capitalizing its revaluation reserve. Accordingly, the Paid-Up Equity Share Capital of the company stands increased by Rs…….. and the revaluation reserve stands reduced by that amount. The issue of bonus shares as aforesaid is contrary to provisions of section 63 of the Companies Act,2013 and the recommendations of the Institute of Chartered Accountants of India. Had the company not issued bonus shares by capitalising its revaluation reserves, its paid-up equity share capital would have been lower by Rs...... and its revaluation reserves would have been higher by Rs......OpinionIn our opinion and to the best of our information and according to the explanations given to us, except for the effects of the matter described in the Basis for Qualified Opinion paragraph, the financial statements give the information required by the Act in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India:
(a)in the case of the Balance Sheet, of the state of affairs of the Company as at March 31, 20XX;
(b)in the case of the Profit and Loss Account, of the profit/ loss for the year ended on that date;  and
(c)in the case of the Cash Flow Statement, of the cash flows for the year ended on that date.

The above is in accordance with Standard of Auditing SA 705 Modifications to the Opinion in the Independent Auditor’s Report and ICAI's Guidance Note on Availability of Revaluation  Reserve for Issue of Bonus Shares

 

Interim Dividend

'Dividend' includes interim dividend
According to section 2(35)of the Companies Act,2013 ('the 2013 Act'), “dividend” includes any interim dividend. This means that whatever provisions apply to declaration of final dividend shall also apply to interim dividend subject, of course, to the provisions of section 123(3) and the proviso to section 123(3).

Sources from which interim dividend can be declared and paid
Section 123(3) of the Companies Act,2013  provides that the Board of Directors of a company may declare interim dividend during any financial year out of:

• the surplus in the Profit and Loss account as well as
• the profits for the financial year in which the interim dividend is sought to be declared. 

Contrast section 123(3) with section 205(1A) of the Companies Act,1956 which provided that
"The Board of Directors may declare interim dividend and the amount of dividend including interim dividend shall be deposited in a separate bank account  within five days from the date of declaration of such dividend"

It can be seen that section 205(1A) of the 1956 Act did not specify the sources from which interim dividend can be declared. Section 123(3) specifies sources from which interim dividend can be declared. It appears that, under the 2013 Act, interim dividend can be paid only from 'surplus in the Profit and Loss Account' and profits of the current financial year. It seems that past profits lying in Reserves cant be used for Interim Dividend. MCA or ICAI needs to clarify this.

Article II(81) of Table F of Schedule I to the 2013 Act provides that subject to the provisions of section 123, the Board may from time to time pay to the members such interim dividends as appear to it to be
justified by the profits of the company.

Maximum rate of interim dividend that can be declared if company has incurred loss during the current financial year up to the end of the immediately preceding quarter
In case the company has incurred loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the average dividends declared by the company during the immediately preceding three financial years. [ Proviso Section 123(3)]

Declaration and Payment of Dividend-II

Sources out of which dividend may be declared
No dividend shall be declared or paid by a company for any financial year except out of—

• profits of the company for that year arrived at after providing for depreciation (current profits),or
• profits of the company for any previous financial year or years arrived at after providing for depreciation and remaining undistributed (past profits remaining undistributed), or 
• both (current profits and past profits remaining undistributed), or 
• money provided by the Central Government or a State Government for the payment of dividend in pursuance of a guarantee given by that Government.

Depreciation has to be provided in accordance with Schedule-II to the Companies Act,2013
Entire past unabsorbed losses need to be set off before dividend is declared

The Companies Act,1956 Act  required that the company shall not declare dividend unless it has provided, in respect of each previous financial year, the loss for that year (after providing for depreciation) or the amount of depreciation provided, whichever is lower.

Example

Year	Profit/(loss) before depreciation (Rs)	Depreciation (Rs)	Profit/(loss) after depreciation (Rs)
2011-12	(100)	25	(125)
2012-13	5	25	(20)
2013-14	28	30	(2)
2014-15	200	30	170

In terms of the provisions of the 1956 Act, the company can declare dividend for 2014-15 only after setting off for each past year amount of loss or depreciation whichever is less. Thus, the following amounts are to be set-off.

Year	Amount to be set-off before declaring dividends(Rs)	Remarks
2011-12	25	Depreciation is lower than the amount of loss.
2012-13	20	Loss is lower than depreciation
2013-14	2	Loss is lower than depreciation
Total	47

Thus, under the 1956 Act, the company needed to set off only Rs 47 out of the Rs147 unabsorbed losses and depreciation from its profit of 2014-15( Rs170) before declaring dividend and company’s divisible profits would be Rs 23. This is against the concept of prudence which demands that the entire unabsorbed loss and depreciation of past years of  Rs 147 be set off against profits of 2014-15 before a dividend is declared and accordingly divisible profits should be only Rs.23. There is no reason why the unabsorbed losses should be set off only to the extent of the unabsorbed depreciation and rest of the unabsorbed losses should not be set off.

The 2013 Act is silent on this issue. Section 123 of the 2013 Act does not contain provisions along the lines of clause (b) of the first proviso to section 205(1) of the 1956 Act. However, Rule 3(5) of the Companies (Declaration and Payment of Dividend) Rules, 2014 notified under the 2013 Act seeks to remedy the situation. Accordingly Rule 3(5) provides that no company shall declare dividend unless carried over previous losses and depreciation not provided in previous year or years are set off against the profit of the company for the current year. In the above example, under the 2013 Act, entire Rs 147(unabsorbed losses) will have to be set off and divisible profits will be only Rs.23.  The 2013 Act is stricter in this regard. It requires setting off of the entire amount of arrears of unabsorbed depreciation and losses (and rightly so) and not merely the lower of the loss after depreciation and depreciation


Only free reserves to be used for declaring dividends
No dividend shall be declared or paid by company from its reserves other than free reserves [Third proviso to section 123(1)].

Definition of free reserves
Section 2(43) of the 2013 Act defines ‘free reserves’ to mean such reserves which, as per the latest audited balance sheet of a company, are available for distribution as dividend.

The following shall not be regarded as free reserves and shall not be available for distribution as dividend :

• unrealized gains, whether shown as reserve or otherwise 
• notional gains, whether shown as a reserve or otherwise 
• amount representing revaluation of assets, whether shown as reserve or otherwise.
• any change in carrying amount of an asset or liability recognized in equity, including surplus in P&L account on measurement of assets or liability at fair value.

Transfer of amounts to reserves is optional [First Proviso to section 123(1)]
The first proviso to section 123(1) provides that a company may, before the declaration of any dividend in any financial year, transfer such percentage of its profits for that financial year as it may consider appropriate to the reserves of the company. There is no requirement along the lines of the 1956 Act to transfer specified percentage of profits before declaring dividend if dividend rate exceeds a specified percentage. The 956 Act which provided for compulsory transfer of prescribed percentage of profits to reserves before declaring dividends at a rate exceeding 10% of paid-up capital.

Declaration of dividends out of accumulated past profits transferred to reserves [Second proviso to section 123(1)].
Where, owing to inadequacy or absence of profits in any financial year, any company proposes to declare dividend out of the accumulated profits earned by it in previous years and transferred by the company to the
reserves, such declaration of dividend shall not be made except in accordance with such rules as may be prescribed in this behalf. [Second proviso to section 123(1)].
Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014 titled ‘Declaration of dividend out of reserves’ provides that in the event of inadequacy or absence of profits in any year, a company may
declare dividend out of free reserves subject to the fulfillment of the following conditions, namely:—

• The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by it in the three years immediately preceding that year. (The above limit on rate of dividend shall not apply to a company, which has not declared any dividend in each of the three preceding financial years).
• The total amount to be drawn from such accumulated profits shall not exceed one-tenth of the sum of its paid-up share capital and free reserves as appearing in the latest audited financial statement.
• The amount so drawn shall first be utilised to set off the losses incurred in the financial year in which dividend is declared before any dividend in respect of equity shares is declared. 
• The balance of reserves after such withdrawal shall not fall below fifteen per cent of its paid up share capital as appearing in the latest audited financial statement. 
• No company shall declare dividend unless carried over previous losses and depreciation not provided in previous year or years are set off against profit of the company of the current year.

Declaration and Payment of Dividend-I

Chapter VIII of the Companies Act,2013 titled 'Declaration and Payment of Dividend' comprises sections 123 to 127(both inclusive)as under :

• Section 123 : Declaration of dividend
• Section 124 : Unpaid dividend account(not yet made applicable)
• Section 125 : Investor Education and Protection Fund(not yet made applicable)
• Section 126 : Right to dividend, rights shares and bonus shares to be held in abeyance pending registration of transfer of shares 
• Section 127 : Punishment for failure to distribute dividends

Comparison of the Companies Act,2013 vis a vis the Companies Act,1956
Various changes made by section 123 of the 2013 Act as regards declaration and payment of dividend are as under:

• Transfer of profits to reserves made optional. Unlike the 1956 Act, it is not necessary to transfer specified percentage of profits to reserves where company intends to declare dividend above a specified percentage.  
• Company will have to provide entire unabsorbed losses and depreciation of earlier years before declaring dividend. Unlike the 1956 Act, it is not sufficient to provide merely lower of loss after depreciation and depreciation.
• Section 123 clearly provides that dividends shall not be declared out of reserves other than free reserves. Since revaluation reserves are excluded from definition of free reserves by section 2(43), declaration of dividends out of revaluation reserves is barred. There was no such express bar in the 1956 Act.
• If company has incurred loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the average dividends declared by the company during the immediately preceding three financial years. Such restriction was not there in the 1956 Act.
• Sub-section (6) of section 123 provides that a company which fails to comply with sections 73 and 74 of the 2013 Act (relating to acceptance of deposits from public/members/repayment of deposits accepted before commencement of the Act) shall not, so long as such failure continues, declare any dividend on its equity shares. There was no such express bar in the 1956 Act

Duty of confidentiality of CA under Code of Ethics

Ingredients of professional misconduct under clause (1) of Part I to the Second Schedule to the Chartered Accountants Act,1949

(i)A CA in practice discloses information acquired in the course of his professional engagement.  
(ii)Such disclosure is to any person other than his client so engaging him.  
(iii)Such disclosure is otherwise than as required by any law for the time being in force. 
(iv)Such disclosure is without the client’s consent. 

If all the above conditions (i) to (iv) are satisfied, disclosure of information by a CA in practice tantamount to professional misconduct. It does not matter whether disclosure is deliberate or unintentional. Also, it does not matter whether client’s interest is actually harmed or not.

One can see that duty of confidentiality is not an absolute on but a qualified one. If disclosure is "as required by any law for the time being in force", the CA cant be held guilty under Clause (1). So legal requirement to disclose(for example section 143(12) of the Companies Act,2013 is good defence in professional misconduct proceedings under clause (1)  especially when the legal requirement overrides the duty of confidentiality(eg section 143(13) of the Companies Act,2013)

Sub-sections (12) of section 143 casts a duty on auditor to report fraud  to the Central Govt if:

• in the course of the performance of his duties as auditor, 
• the auditor has reason to believe that an offence involving fraud is being or has been committed
• the fraud is against the company by officers or employees of the company 

Sub-sections (13) of section 143 provide as under:

• No duty to which an auditor of a company may be subject to (e.g. duty of confidentiality under the Chartered Accountants Act,1949) shall be regarded as having been contravened by reason of his reporting the matter as above if it is done in good faith. [Section 143(13)]

So if auditor reports fraud to Central Government in confirmity with Section 143(12) in good faith, he gets the benefit of protection of section 143(13) and cannot be held guilty of violating duty of confidentiality under clause (1) of Part I to the Second Schedule to the Chartered Accountants Act,1949

Auditor to attend Annual General Meeting

Under the 1956 Act, it was entirely up to the auditor whether to attend any general meeting of the company or not and whether or whom to depute as his representative at such meetings. Section 146 of the 2013 Act brings a sea change in this. Now, auditor shall, unless otherwise exempted by the company, attend any general meeting : (i) by himself or (ii) through his authorised representative who is qualified to be an auditor.

Section 146 deals with:

• Duty of company to forward notices of general meetings to auditors 
• Auditor’s duty to attend general meeting and right to be heard at general meeting

  

Notices of general meetings to be forwarded to the auditor of the company

The first limb of section 146 provides that all notices of, and other communications relating to, any general meeting shall be forwarded to the auditor of the company. The forwarding of notices and other communications is required irrespective of whether the agenda for the meeting contains any item related to accounts or audit or auditors.

Auditor’s duty to attend general meeting and right to be heard at general meeting

The second limb of section 146 deals with auditor’s attendance at general meetings and auditor’s right to be heard at general meetings. The second limb of section 146 provides as under:

(A)he auditor shall, unless otherwise exempted by the company, attend any general meeting

(i)by himself, or

(ii)through his authorised representative who is qualified to be an auditor.

(B)The auditor shall have right to be heard at such meeting on any part of the business which concerns him as the auditor.

The following points are noteworthy:

• Section 146 makes auditor’s attendance at general meetings compulsory either by himself or authorized representative qualified to be an auditor. 
• Such attendance is compulsory whether or not any matter related to accounts or audit or auditors is scheduled in the agenda of the general meeting. 

'Quarantining’ audit from other serivces

Quarantining’ audit from other services - Services which auditor should not provide to the auditee-company-Section 144 of the Companies Act,2013

Section 144 stipulates what the Cadbury Report termed as ‘quarantining audit from other services’ but recommended against the same. Section 144 of the Act provides that an auditor appointed under this Act shall not directly or indirectly  provide any of the following “other services” (i.e. services other than statutory audit under the 2013 Act) to auditee-company or its holding company or subsidiary company :

• accounting and book-keeping services; 
• internal audit; 
• design and implementation of any financial information system; 
• actuarial services; 
• investment advisory services; 
• investment banking services; 
• rendering of outsourced financial services; 
• management services; and 
• any other kind of services as may be prescribed.

Services other than the above may be provided by the auditor to the company only if the services are approved by the Board of directors or the audit committee, as the case may be.

Transitional provisions

An auditor or audit firm who or which has been performing any non-audit services on or before the commencement of this section shall comply with this section before the closure of the first financial year after the date of such commencement.

“Directly or indirectly”

The Explanation to section 144 defines the expression “directly or indirectly” as under :

(A) In case auditor being an individual

(B) In case of auditor being a firm (including LLP incorporated under the LLP Act)

The term “directly or indirectly” shall include rendering of services : either by himself or  through his relative  or  through any other person connected or associated with himself  through any other entity, whatsoever, in which such individual has significant influence or  through any other entity, whatsoever, in which such individual has control or  through any other entity whose name or trade mark or brand is used by such individual.

The term “directly or indirectly” shall include rendering of services: either by itself or  through any of its partners or  through its parent or  through its subsidiary or  through its associate entity or  through any other entity in which the firm has significant influence or  through any other entity in which the firm has control or  through any other entity whose name or trade mark or brand is used by the firm  through any other entity in which any partner of the firm has significant influence  through any other entity in which any partner of the firm has control  through any other entity whose name or trade mark or brand is used by any of its partners.

It may be noted that the expressions, ‘associate entity’, ‘associated person’, ‘connected person’ are used in the Explanation to section 144 but are not defined in the Act.

Duty of Auditor to report fraud to Central Govt

Backdrop
Sub-sections (12) to (14) of section 143 of the Companies Act,2013 are new provisions . There were no provisions along these lines in the Companies Act,1956

Duty of auditor/cost auditor/secretarial auditor to report fraud
Sub-sections (12) of section 143 casts a duty on auditor to report fraud  to the Central Govt if:

• in the course of the performance of his duties as auditor, 
• the auditor has reason to believe that an offence involving fraud is being or has been committed
• the fraud is against the company by officers or employees of the company 

Sub-sections (13) and (14) of section 143 provide as under:

• No duty to which an auditor of a company may be subject to (e.g. duty of confidentiality under the Chartered Accountants Act,1949) shall be regarded as having been contravened by reason of his reporting the matter as above if it is done in good faith. [Section 143(13)]
• The provisions of section 143 are applicable mutatis mutandis to cost auditor (section 148) and secretarial auditor (section 204).[Section 143(14)]

Only frauds against company by officers/employees to be reported .Frauds committed by the company (on outsiders/creditors/investors etc.) are outside the scope of reporting requirements under section 143(12). If auditor reports frauds committed by the company, he cannot avail the immunity under section 143(13) and would be liable for professional misconduct for breach of confidentiality under clause (1) of Part I of the Second Schedule to the CA Act, 1949.


Manner of reporting frauds to the Central Government
Rule 13 of the Companies (Audit and Auditors) Rules, 2014 prescribes the manner of reporting to Central Government under section 143(12).

Rule 13 provides that  in case the auditor has sufficient reason to believe that an offence involving fraud, is being or has been committed against the company by officers or employees of the company, he shall report the matter to the Central Government immediately but not later than sixty days of his knowledge and after following the procedure as under :

Draft Report to BOD/Audit Committee

• Auditor shall forward his report to the Board or the Audit Committee,as the case may be, immediately after he comes to knowledge of the fraud, seeking their reply or observations within forty-five days;

Report to Central Govt. after considering reply/observation of BOD/ Audit Committee

• On receipt of such reply or observations the auditor shall forward hisreport and the reply or observations of the Board or the AuditCommittee alongwith his comments (on such reply or observationsof the Board or the Audit Committee) to the Central Governmentwithin fifteen days of receipt of such reply or observations;

If no reply within 45 days

• In case the auditor fails to get any reply or observations from theBoard or the Audit Committee within the stipulated period of fortyfivedays, he shall forward his report to the Central Government alongwith a note containing the details of his report that was earlier forwarded to the Board or the Audit Committee for which he failed to receive any reply or observations within the stipulated time.
• The report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed cover by registered post with acknowledgement due or by speed post followed by an e-mail in confirmation of the same.
• The report shall be on the letter-head of the auditor containing postal address, e-mail address and contact number and be signed by the auditor with his seal and shall indicate his Membership Number.
• The report shall be in the form of a statement as specified in Form ADT-4.

The provision of  Rule 13 shall also apply, mutatis mutandis, to a cost auditor and a secretarial auditor during the performance of his duties under section 148 and section 204 respectively.

Punishment for contravention of section 143(12)

• If any auditor, Cost Accountant or Company Secretary in practice do not report fraud committed or being committed as above, he shall be punishable with fine which shall not be less than Rs. 1,00,000 but which may extend to Rs. 25,00,000. [Section 143(15)]
• In addition to punishment under section 143(15), it would appear that the auditor of the company would also be liable to punishment under subsection (2) of section 147  since the said provision refers to contravention of ‘any provision of ....... section 143’.

Consolidated Financial Statements

Backdrop

The Companies Act,1956  was silent on consolidated financial statements. Section 129 of the Companies Act,2013 has made  consolidated financial statements mandatory  in cases where company has one or more subsidiaries or associates or joint ventures.

• Section 212 of the 1956 Act required  a holding company to attach to its balance sheet a statement showing holding company’s interest in subsidiary [See section 212(5) of the 1956 Act].  The 2013 Act omits this requirement.
• Instead the 2013 Act requires the holding company to attach with its financial statement, a separate statement containing the salient features of the financial statement of its subsidiary/ies, associate companies and joint ventures in Form No. AOC-1 of Companies (Accounts) Rules, 2014.
• The provisions relating to what should be the financial year of subsidiary [See section 212 of the 1956 Act] have also been omitted from the 2013 Act as the concept of uniform financial year of 1st April to 31st March has been made mandatory for companies under the 2013 Act.

Separate Financial Statements [Section 129(2)]

Section 129(2) of the Companies Act,2013 requires that "At every annual general meeting of a company, the Board of Directors of the company shall lay before such meeting financial statements for the financial year".  Section 129(2) casts an obligation on every company. . In the context of a holding company, the financial statements referred to in sub-section (2) are commonly referred to as 'separate financial statements'


Consolidated Financial Statements

• Section 129(3) provides that where a company has one or more subsidiaries, it shall, prepare a consolidated financial statement of the company and of all the subsidiaries in the same form and manner as that of its own.
• The consolidated financial statements shall be in addition to its separate financial statements[ie .its financial statement under sub-section (2)]
• The  consolidated financial statements which shall also be laid before the annual general meeting of the company along with the laying of its separate financial statements[ie .its financial statement under sub-section (2)]
• The company shall also attach along with its financial statement, a separate statement containing the salient features of the financial statement of its subsidiary or subsidiaries in such form as may be prescribed (ie in Form AOC-1).
• The Central Government may provide for the consolidation of accounts of companies in such manner as may be prescribed.[See Rule 6 below]
• For the purposes of this sub-section [ie section 129(3)], the word “subsidiary” shall include associate company and joint venture.

Section 129(4) provides that the provisions of this Act applicable to the preparation, adoption and audit of the financial statements of a holding company shall, mutatis mutandis, apply to the consolidated financial statements referred to in sub-section (3).



Rules Prescribed by Central Govt for consolidation[Rule6]
Rule 6 of the Companies (Accounts) Rules, 2014 provides that

• The consolidation of financial statements of the company shall be made in accordance with the provisions of Schedule III of the Act and the applicable accounting standards.
• In case of a company covered under sub-section (3) of section 129 which is not required to prepare consolidated financial statements under the Accounting Standards, it shall be sufficient if the company complies with provisions on consolidated financial statements provided in Schedule III of the Act.

 

Practical problems of Advanced Auditing and Professional Ethics-I

Comment on the following in the light of the provisions of Companies Act,2013
(1)PQR Ltd ,a  listed company, appoints R as its internal auditor. R is a member of Institute of Chartered Accountants of India but does not hold a certificate of practice
(2)ABC Ltd, a  listed company, proposes to appoint X& Co,a CA firm,as its internal auditor. X &Co are statutory auditors of  A Ltd. which is a subsidiary of ABC Ltd
(3)MNO Ltd,,a  listed company, appoints M as its internal auditor. M is a member of Institute of Cost Accountants of India but does not hold a certificate of practice
(4)ZLtd,a  listed company, contends that it is not required to appoint an internal auditor since its figures for preceding financial year were as under:
paid-up capital-Rs48 crores
turnover-Rs150 crores
outstanding loans or borrowings- Rs 90 crores
outstanding deposits-Nil
(5)PQR Pvt Ltd, had turnover of Rs. 180 crores and paid-up capital of Rs.60 crores  during the preceding financial year . Its outstanding loans or borrowings were Nil during the preceding financial year.  The company hasnt appointed any internal auditor

Books of account in electronic mode

The second proviso to section 128(1) of the Companies Act,2013 provides that "the company may keep  books of account or other relevant papers in electronic mode in such manner as may be prescribed. Thus, under the Act, it is  not  compulsory to maintain books of account or other relevant papers in electronic mode. However, if a company opts to keep books of account or other papers in electronic mode, the company must comply with the rules prescribed in this regard ie Rule 3 of the Companies(Accounts) Rules,2013

Electronic Mode
"Electronic Mode"

• includes 'electronic form' as defined in section 2(1)(r) of the Information Technology Act,2000
• and also includes 'electronic record' as defined in section 2(1)(f) of the Information Technology Act,2000

Manner in which books of account are to be kept in electronic mode
Sub-rules(1) to (5) of  Rule 3 provide as under:

• The books of account and other relevant books and papers maintained in electronic mode shall:
• remain accessible in India so as to be usable for subsequent reference.
• be retained completely:
• in the format in which they were originally generated, sent or received, or 
• in a format which shall present accurately the information generated, sent or received 

• The information contained in the electronic records shall 
• remain complete and unaltered.
•  be capable of being displayed in a legible form 

• The information received from branch offices shall:
• not be altered and 
• be kept in a manner where it shall depict what was originally received from the branches.  

• There shall be a proper system for storage, retrieval, display or printout of the electronic records as the Audit Committee, if any, or the Board may deem appropriate 
• Such records shall not be disposed of or rendered unusable, unless permitted by law. 
• The back-up of the books of account and other books and papers of the company maintained in electronic mode, including at a place outside India, if any, shall be kept in servers physically located in India on a periodic basis.

Sub-rule (6) of Rule (3) provides that the company shall intimate to the Registrar on an annual basis at the time of filing of financial statement—

  (a)  the name of the service provider;

  (b)  the internet protocol address of service provider;

  (c)  the location of the service provider (wherever applicable);

  (d)  where the books of account and other books and papers are maintained on cloud, such address as provided by the service provider.