CHAPTER 5

The final accounts are primarily prepared for ascertaining the operational result and the financial
position of the business. These are prepared with the help of Trial Balance.

The final accounts consist of the following two accounts:

1. Profit and Loss Account, and

2. Balance Sheet.

How are these two accounts prepared is explained and exemplified subsequently.

1. Profit and Loss Account:

The Profit and Loss Account is prepared for ascertaining whether the business earned profit or
incurred loss during a particular period of time called accounting period. All nominal accounts are
entered into Profit and Loss Account. As a rule, all expenses and losses are shown on the debit side
and all incomes and gains are shown on the credit side of the Profit and Loss Account.

Then, the totals of debit side and credit side are compared for ascertaining profit or loss of the
business during the accounting period. If the total of credit side exceeds the total of debit side, the
excess will be profit earned during the period.

On the contrary, if the total of debit side exceeds the total of credit side, the excess will be loss
incurred during the period. The net result, whether profit or loss, is transferred to the Balance Sheet
also called ‘Position Statement’.

Taking our previous Illustration 1 here again, let us study how the Profit and Loss Account is
prepared. Remember, the first part of the Profit and Loss Account contains the Trading Account
which contains information on opening stock, purchases, direct expenses and sales.

There is a common practice to prepare a combined Trading and Profit &c Loss Account as shown
below:
2. Balance Sheet:

Having ascertained the operational results, i.e., profit or loss by preparing the Profit & Loss Account,
one final account still remains to be prepared is the Balance Sheet. The Balance Sheet is primarily
prepared to know the financial position of the business.

Hence, the Balance Sheet is also called ‘Position Statement.’ In other words, the Balance Sheet
shows what the business owns and what it owes to others, or say, how much assets and how much
liabilities it has.

As already mentioned, all nominal accounts i.e., accounts relating to expenses, losses, profits,
incomes, gains, etc. are shown in the Profit and Loss Account. All remaining accounts representing
personal and real accounts are shown in the Balance Sheet. The accounts showing debit balances
represent assets and the accounts showing credit balances represent liabilities.

All assets and liabilities are, then, shown on their respective sides in the Balance Sheet. Like Trial
Balance, the total of asset side should be equal to the total of liability side. The reason being the
double entry passed for every transaction.

For every debit entry, there is an equal and corresponding credit entry and vice versa. However, if
the two totals do not tally, it implies that some errors have been committed in the books of
accounts. These errors need to be traced out and, then, rectified.

The preparation of the Balance Sheet is illustrated with the help of our imaginary Trial Balance given
earlier.
Now, you have noticed that each account appearing in the Trial Balance is shown either in the Profit
and Loss Account or in the Balance Sheet. As a rule, all nominal accounts appeared in the Trial
Balance are shown in the Profit and Loss Account and all personal and real accounts are shown in
the Balance Sheet.

Meaning of Fund Flow Statement:

A fund flow statement is a statement in summary form that indicates changes in terms of financial
position between two different balance sheet dates showing clearly the different sources from which
funds are obtained and uses to which funds are put.

It summarizes the financing and investing activities of the enterprise during an accounting period.

By depicting all inflows and outflows of fund, the statement shows their net impact on working
capital of the firm.

If the total of inflows is greater than the outflows, the excess goes to increase in working capital. If
there is deficit of funds during a particular accounting period, the working capital is impaired. So
fund flow statement is an important tool for working capital management.

Some definitions of financial experts are given for the clear conception of fund flow statement:

According to R. N. Anthony:

“The funds flow statement describes the sources from which additional funds were derived and the
uses to which these funds were put.”

Roy A. Fouke defines fund flow statement as “a statement of sources and application of funds is a
technical device designed to analyse the changes in the financial condition of a business enterprise
between two dates.”

Thus, the fund flow statement reveals the volume of financial transactions and explains the flow of
funds taking place within a business during a particular period of time and its effect on the net
working capital. It is not a substitute for either the Profit and Loss Account or the Balance Sheet, but
it is an useful supplement to them.

It describes the sources from which funds are obtained and the uses of these funds, in a condensed
form.
Objectives of Fund Flow Statement:

Some of the important objectives of preparing fund flow statement are:

1. Fund flow statement reveals clearly the changes in items of financial position between two
different balance sheet dates showing clearly the different sources and applications of funds. Thus, it
summarizes the financing and investing activities of the enterprise.

2. It also reveals how much of the total funds is being collected by disposing of fixed assets, how
much from issuing shares or debentures, how much from long-term or short-term loans, and how
much from normal operational activities of the business.

3. It also provides information about the specific utilisation of such funds i.e., how much has been
used for acquiring fixed assets, how much for redemption of preference shares, debentures or short-
term loans as well as payment of tax, dividend etc.

4. It helps the management in depicting all inflows and outflows of funds which cause a change in
working capital of a business organisation.

5. The projected fund flow statement helps management to exercise budgetary control and capital
expenditure control in the enterprise.

Management uses fund flow statement for judging the financial and operating performance of the
business.

Importance of Fund Flow Statement:

The importance of fund flow statement may be summarised:

1. Analyses Financial Statements:

Balance Sheet and Profit and Loss Account do not reveal the changes in the financial position of an
enterprise. Fund flow analysis shows the changes in the financial position between two balance
sheet dates. It provides details of inflow and outflow of funds i.e., sources and application of funds
during a particular period.

Hence it is a significant tool in the hands of the management for analysing the past, and for planning
the future. They can infer the reasons for imbalances in the uses of funds in the past and take
corrective measures for the future.

2. Answers Various Financial Questions:

Fund flow statement helps us to answers various financial questions such as:

(a) How much fund flowed into the business?

(b) How much of these funds were provided by the operations?

(c) What are the other sources of funds?

(d) How were these funds used?

(e) Why was there less/more amount of net working capital at the end of the period than at the
beginning?

(f) Why were the dividends not larger?

(g) How was the purchase of fixed assets financed?

(h) Where have the net profits gone?

(i) How were the loans repaid?

3. Rational Dividend Policy:

Sometimes it may happen that a firm, instead of having sufficient profit, cannot pay dividend due to
inadequate working capital. In such circumstances, fund flow statement shows the working capital
position of a firm and helps the management to take policy decisions on dividend etc.

4. Proper Allocation of Resources:

Financial resources are always limited. So it is the duty of the management to make its proper use. A
projected fund flow statement enables the management to take proper decision regarding allocation
of limited financial resources among different projects on priority basis.

5. Guide to Future Course of Action:

The future needs of the fund for various purposes can be known well in advance from the projected
fund flow statement. Accordingly, timely action may be taken to explore various avenues of fund.

6. Proper Managing of Working Capital:

It helps the management to know whether working capital has been effectively used to the
maximum extent in business operations or not. It depicts the surplus or deficit in working capital
than required. This helps the management to use the surplus working capital profitably or to locate
the resources of additional working capital in case of scarcity.

7. Guide to Investors:

It helps the investors to know whether the funds have been used properly by the company. The
lenders can make an idea regarding the creditworthiness of the company and decide whether to
lend money to the company or not.

8. Evaluation of Performance:

Fund flow statement helps the management in judging the financial and operating performance of
the company.

Limitations of Fund Flow Statement:

Despite its various advantages, the fund flow statement suffers from certain limitations:
1. Historical Nature:

The information used for the preparation of the fund flow statement is essentially historical in
nature. It does not estimate the sources and application of funds for the near future.

2. Structural Changes Not Disclosed:

The fund flow statement does not disclose the structural changes in financial relationship in a firm.
In other words, it does not reveal shifts among items making up the current assets and current
liabilities. It does not tell us whether any loss of working capital has unduly weakened the financial
position or not.

3. Not Foolproof:

The fund flow statement is prepared from the data provided in the balance sheet and profit and loss
account. Hence, the defects in financial statements will be carried over to the fund flow statement
also.

4. Ignores Non-Fund Items:

As fund flow statement ignores non-fund items, it becomes a crude device compared to income
statement and balance sheet.

5. Not Relevant:

A study of changes in cash (i.e., cash flow statement) is more relevant than a study of changes in
funds for the purpose of managerial decision-making.

General Rules:

We know, working capital (WC) = Current Assets (CA) – Current Liabilities (CL) or, WC = CA – CL

From the above equation, we may deduce

(i) An increase in CA or a decrease in CL – Causes an increase in WC

(ii) A decrease in CA or an increase in CL – Causes a decrease in WC

(iii) A simultaneous increase in CA and CL or a simultaneous decrease in CA and CL— will have no
effect on WC.

A flow of funds takes place only if a transaction involves one current account (CA or CL) and one
Non-current account (NCA or NCL).

From above the following general rules can be formed:

(i) Transactions which involve only current accounts (CA or CL) do not result in a flow of funds.

(ii) Transactions which involve only Non-current accounts (NCA or NCL) do not result in a flow of
funds.
(iii) Transactions which involve one current account (CA or CL) and one Non-current account (NCA or
NCL) results in a flow of funds.

Preparation of Fund Flow Statement:

Generally, two comparative balance sheets—one at the beginning and the other at the end of the
period—are used for preparing a fund flow statement. In addition, a summarised income statement
comprising non-fund or ‘non-operating’ items and a statement of retained earnings or at least
material information from these statements are required in order to find out fund from operations.

Additional information regarding change in non-current accounts like plant and machinery, building,
share capital, debentures etc., if available, will sharpen the firms financial profile as revealed by the
fund flow statement.

The fund flow analysis involves the preparation of two statements:

(a) Statement or Schedule of Changes in Working Capital and

(b) Statement of Sources and Application of funds.

1. Statement or Schedule of Changes in Working Capital:

The primary purpose of a fund flow statement is to explain the net change in working capital, it will
be better to prepare first the schedule of changes in working capital before preparing a fund flow
statement.

The Schedule or Statement of changes in working capital is a statement that compares the change in
the amount of current assets and current liabilities on two balance sheet dates and highlights its
impact on working capital.

The format of this statement is:

2. Fund Flow Statement:

After preparing the schedule of changes in working capital, the next step is to prepare the Fund Flow
Statement to find out the different sources and applications of funds. While preparing this
statement the emphasis is given on the changes in the fixed assets and fixed liabilities. The
statement may be prepared either in ‘T form’ or in ‘Vertical form’.

A proforma of each of them is given:

Notes:

(1) Either of the two will appear in the Fund Flow Statement.

(2) Either of the two will appear in the Fund Flow Statement.

(3) Payment of dividend and tax will appear as an application of funds only when these items are
appropriation of profits and not current liabilities

Meaning of Cash Flow Statement:

A cash flow statement is a statement of changes in the financial position of a firm on cash basis.
It reveals the net effects of all business transactions of a firm during a period on cash and explains
the reasons of changes in cash position between two balance sheet dates.

It shows the various sources (i.e., inflows) and applications (i.e., outflows) of cash during a particular
period and their net impact on the cash balance.

According to Khan and Jain:

“Cash Flow statements are statements of changes in financial position prepared on the basis of
funds defined as cash or cash equivalents.”

The Institute of Cost and Works Accountants of India defines Cash Flow statement as “a statement
setting out the flow of cash under distinct heads of sources of funds and their utilisation to
determine the requirements of cash during the given period and to prepare for its adequate
provision.”

Thus, a cash flow statement is a statement which provides a detailed explanation for the changes in
a firm’s cash balance during a particular period by indicating the firm’s sources and uses of cash and,
ultimately, net impact on cash balance during that period.

Features of Cash Flow Statement:

The features or characteristics of Cash Flow Statement may be summarised in the following way:

1. It is a periodical statement as it covers a particular period of time, say, month or year.

2. It shows movement of cash in between two balance sheet dates.

3. It establishes the relationship between net profit and changes in cash position of the firm.

4. It does not involve matching of cost against revenue.

5. It shows the sources and application of funds during a particular period of time.

6. It records the changes in fixed assets as well as current assets.

7. A projected cash flow statement is referred to as cash budget.

8. It is an indicator of cash earning capacity of the firm.

9. It reflects clearly how financial position of a firm changes over a period of time due to its
operating activities, investing activities and financing activities.

Objectives of Cash Flow Statement:

Cash Flow Statement is prepared to fulfill some objectives.

Some of the main objectives of Cash Flow Statement are:

1. It shows the cash earning capacity of the firm.

2. It indicates different sources from which cash been collected and various purposes for which cash
has been utilised during the year.

3. It classifies cash flows during the period from operating, investing and financing activities.

4. It gives answers to various perplexing questions often encountered by management, such as why
the firm is unable to pay dividend instead of making enough profit? Why is there huge idle cash
balance in spite of loss suffered? Where have the proceeds of sale of fixed assets gone? etc.

5. It helps the management in cash planning and control so that there are no shortage or surplus of
cash at any point of time.

6. It evaluates the ability of the firm to meet obligations such as loan repayment, dividends, taxes
etc.

7. A prospective investor consults the cash flow statement to ensure that his investment gets regular
returns in future.

8. It discloses the reasons for differences among net income, cash receipts and cash payments.

9. It helps the management in taking capital budgeting decisions more scientifically. 10. It ensures
optimum use of funds for the maximum benefit of the enterprise.

Utility or Importance of Cash Flow Statement:

Cash Flow Statement is useful for short-term planning and control of cash. A business entity needs
sufficient amount of cash to meet its various obligations in the near future such as payment for
purchase of fixed assets, payment of debts, operating expenses of the business etc.

It helps the financial manager to make a cash flow projection for the immediate future taking the
data relating to cash inflows and cash outflows from past records. As such, it becomes easy for him
to know the cash position which may either result in a surplus or a deficit one. Thus, cash flow
statement is another important tool of financial analysis for the management.

Its main advantages are:

1. Evaluation of Cash Position:

It is very helpful in understanding the cash position of a firm. Since cash is the basis for carrying on
business operations smoothly, the cash flow statement is very useful in evaluating the current cash
position of the business.

2. Planning and Control:

A projected cash flow statement enables the management to plan and coordinate the financial
operations properly. The financial manager can know how much cash is needed, from where it will
be derived, how much can be generated internally, and how much could be obtained from outside.

3. Performance Evaluation:
A comparison of actual cash flow statement with the projected cash flow statement will disclose the
failure or success of the management in managing cash resources. Deviations will indicate the need
for corrective actions.

4. Framing Long-term Planning:

The projected cash flow statement helps financial manager in exploring the possibility of repayment
of long-term debts which depends upon the availability of cash.

5. Capital Budgeting Decision:

A projected cash flow statement also helps the management in taking capital budgeting decisions.

6. Liquidity Position:

Liquidity position of a firm refers to its ability to meet short-term obligations such as payment of
wages and other operating expenses etc. From cash flow statement the financial manager is able to
understand how well the firm is meeting these obligations.

At the same time the ability of the firm in cash earning can be known from cash flow statement. As a
matter of fact, a firm’s profitability is ultimately dependent upon its cash earning capacity.

7. Answers to Different Questions:

Cash flow statement is able to explain some questions often encountered by the financial manager
such as, why is the firm not able to pay dividend in spite of making huge profit? Why there is huge
cash balance in spite of loss etc.

Limitations of Cash Flow Statement:

Cash Flow Statement is, no doubt, an important tool of financial analysis which discloses the
complete story of cash management. The increase in—or decrease of—cash and reasons thereof,
can be known, However, it has its own limitation.

These limitations are:

1. Since cash flow statement does not consider non-cash items, it cannot reveal the actual net
income of the business.

2. Cash flow statement cannot replace fund flow statement or income statement. Each of them has
a separate function to perform which cannot be done by the cash flow statement.

3. The cash balance as disclosed by the projected cash flow statement may not represent the real
liquid position of the business since it can be easily influenced by the managerial decisions, by
making certain payments in advance or by post ponding payments.

4. It cannot be used for the purpose of comparison over a period of time. A company is not better off
in the current year than the previous year because its cash flow has increased.

5. It is not helpful in measuring the economic efficiency in certain cases e.g., public utility service
where generally heavy capital expenditure is involved
ANNUAL REPORT

The following points highlight the nine important contents of an annual report.

Content # 1. Chairman’s Speech:

Chairman’s speech highlights corporate activities, strategies, researches, labour relations, main
achievements, focuses on future goals, growth. In corporate annual report, the chairman’s speech
may not always be found but may be provided to shareholders as a separate document. Chairman’s
speech may concentrate on economic condition of the industry to which the corporate unit belongs
and the economy of the country.

Sometimes chairman’s speech contains useful data on sales, foreign exchange earnings etc. for
different segments of the company. Speech may consist of generalizations and constructive
comments about industry and economy. This speech is actually delivered at the annual general
meeting of the shareholders. Investors should carefully read the future plans and strategies of the
company.

Content # 2. Director’s Report:

Section 217 of the Company law makes it mandatory on the part of directors to make out and attach
to every balance sheet laid in an annual general meeting of the company, a report, known as
director’s report. As per provisions of Section 217 of Company law, directors are to present their
report with respect to the state of company’s affairs, the amount if any which they purposes to earn,
to any reserve and dividend, materials changes and commitments if any, conservation of energy ;
technology absorption and foreign exchange earnings. The board’s report is generally signed by the
chairman if authorized, otherwise it is signed by the company’s manager or secretary if any, by not
less than two directors of the company, one of whom shall be managing director.

Content # 3. Auditor’s Report:

Section 227 of the Companies Act says that the auditors shall make a report to the members of the
company. It is the obligatory duty of the directors to get the accounts of company audited every year
by qualified auditors. An auditor is appointed by the shareholders of a company to audit accounts
and as such, auditor addresses the report to the shareholders of the company on the accounts
audited by him. It is the duty of the board of directors to attach the auditor’s report to the balance
sheet so as to provide acopy of auditor’s report to every member of company. Following is the
specimen of a auditor’s report for reference of the students.

Content # 4. Balance Sheet:

Balance sheet which is also known as position statement provides a bird’s eye view on company’s
financial position as well as condition. This statement indicates whatever company has and whatever
company owes. The excess of assets over liabilities is known as owners equity/shareholders funds.

Content # 5. Profit and Loss Account:

The profit and loss account which is also known as Income Statement indicates net profits earned by
company during current financial year. Income statement also indicates profits available for
distribution and appropriation after meeting tax liabilities. Profit and Loss Appropriation Account or
Retained Earnings Account is also submitted with profit and loss account which indicates
appropriations made during the period.

Content # 6. Schedules:

An average annual report generally contains some schedules forming part of balance sheet and
others forming part of profit and loss account. These schedules are attached with financial
statements for giving detailed information regarding items concerned. Students are advised to see
schedules forming parts of accounts on Page 8.34 of Chapter 8 for reference.

Content # 7. Cash Flow Statement:

The accounting standard AS-3 (Revised) cash flow statements issued by ICAI in March 1997 has made
obligatory on the part of companies for reporting its cash flows as per the requirements of the
standard. Detailed discussion has been made in chapter 5 entitled cash flow statement regarding
preparation of cash flow statement as per provisions of AS-3.

Content # 8. Accounts of Subsidiary:

Section 212 of the Companies Act 1956 requires companies to provide statement pursuant to
section 212 regarding information’s about subsidiaries duly signed by directors and company
secretary on behalf of the board of directors along with detailed information regarding directors of
different subsidiaries along with secretary auditors and bankers. An information about the addresses
of registered offices is also to be attached.

Content # 9. Corporate Governance:

Corporate Governance focuses on a company’s structure and processes to ensure transparent and
responsible corporated behaviour corporate Governance is not a sati exercise rather it is a dynamic
process effective corporate Governance not only reduces the agency costs incurred due to division
of ownership but it helps in saving of time and resources of investors. On the other hand poor
corporate governance practices enhance the agency costs and reduce firm valuation.

Whereas good corporate governance facilitates independent supervision of company’s management

and encourages effective decision making which enhances firm value, reputation, credit rating,
improves overall performance, lowers cost of capital, improves access to capital markets and
increases competitive edge.

The financial year 2000-01 is important for those who value of corporate governance. A beginning
has been made in India far mandatory observance of corporate governing practices through clause
49 of the listing agreement of the stock exchanges.

All companies which are part of Group A of Bombay Stock Exchange or S & P CNX Nighty index as on
January, 1, 2000 have to implement Corporate Governance practice on or before March 31, 2001.
Other listed companies with paid up capital of Rs 30 million and above are also to implement
Corporate Governance practices as per the time schedule given in clause 49, but in any case not later
than March 31, 2003.

Content # 10. Accounting Policies:

It has been observed that an average annual report in India use to contain a statement of disclosure
on accounting policies followed by the company while preparing financial statements. It may be due
to the mandatory compliance of AS-1 (Disclosure of accounting policies). Accounting policies are the
specific accounting principles and the methods of applying those principles.

Accounting policies represent choices among different accounting methods that can be used while
preparation of financial statements. Every reporting entity use to disclose various accounting policies
followed while presenting various items of income statement as well as of balance sheet for instance
method followed for charging depreciation on Fixed Assets.

CHAPTER 6

APPOINTMENT OF AUDITORS

The various laws require the appointment of auditors. The law under which we appoint lays down
the procedure of appointment of auditors and also the rights, duties and the functions of the
auditor. An auditor shall be independent. Here we will discuss the appointment of an auditor as per
the provisions of the Companies Act, 2013.

Appointment of Auditors

Within thirty days from the date of the registration of the Company other than the Government
Company, it’s Board of Directors need to appoint an individual or a firm as the first auditor of the
company. The members shall ratify the appointment of the first auditor in the first annual general
meeting of the company.

The first auditor of the company holds office from the conclusion of the first annual general meeting
until the conclusion of the sixth annual general meeting and after this until the conclusion of every
sixth meeting. However, the members of the company ratify the appointment of auditors at every
annual general meeting However, in a case where the Board of Directors fails to appoint the first
auditors of the company they shall inform the members of the Company. Thus, the members shall
appoint the first auditors of the company within ninety days at an extraordinary general meeting.
The auditor so appointed shall hold the office until the conclusion of the first AGM.
The Board of Directors shall fill any casual vacancy in the office of the auditor of a company other
than a Government Company within thirty days. This does not include any casual vacancy arising out
of the resignation of an auditor. However, in case of a casual vacancy arising out of the resignation
of an auditor, the Board of Directors shall fill the vacancy within thirty days. But, the company needs
to approve this appointment at a general meeting within three months of the Board’s
recommendation. Such an auditor shall also hold the office till the conclusion of the next annual
general meeting.

Re-appointment of a Retiring Auditor

The members can re-appoint the retiring order at the annual general meeting of the company:

1. If he is not disqualified for re-appointment.

2. If he has not given a notice in writing to the company expressing his unwillingness to be re-
appointed.

3. When a special resolution has not been passed by the members at that meeting appointing
some other auditor or expressly providing that he should not be re-appointed.

It is noteworthy here that if at any annual general meeting the members do not appoint or re-
appoint any auditors, the existing auditor shall continue to be the auditor of the company.

Appointment of Auditors of Government Companies

Government Company refers to the companies that are owned or controlled, directly or indirectly,
by the Central Government or by any State Government or Governments, or partly by the Central
and State Government.

In the case of a Government Company, the Comptroller and Auditor-General of India shall appoint
the first auditor within sixty days from the date of registration of the company.

If the Comptroller and Auditor-General of India fail to appoint such auditor within the period of sixty
days, the Board of Directors shall appoint the first auditors within the next thirty days.

However, if the Board of Directors also fails to appoint the first auditors within thirty days they shall
inform the members of the Company.

Thus, the members shall appoint the first auditors of the company within sixty days at an
extraordinary general meeting. Also, the auditor so appointed shall hold the office until the
conclusion of the first AGM.

In respect of a financial year, the Comptroller and Auditor-General of India shall appoint an auditor
within a period of one hundred and eighty days from the commencement of the financial year. Such
auditor shall hold office until the conclusion of the annual general meeting.

Also, the Comptroller and Auditor-General of India shall fill any casual vacancy in the office of the
auditor of the Government Company within thirty days. If the Comptroller and Auditor-General of
India fail to fill such vacancy within the period of thirty days, the Board of Directors shall fill such
vacancy within next thirty days.
. The Companies Act, 2013 states that the system of rotation of auditors is applicable to all:

1. listed companies.

2. Unlisted Public companies having paid up share capital of Rs. 10 crores or more.

3. Private limited companies having paid up share capital of Rs. 20 crores or more.

4. Companies that have the paid-up share capital below the above limits but have public
borrowings from financial institutions, banks or public deposits of Rs. 50 crores or more.

However, this concept of rotation is not applicable to one person companies and small companies.

All the above companies cannot appoint or re-appoint an individual as an auditor for more than one
term of consecutive five years. Thus, an individual auditor is not eligible for re-appointment in the
same company for five years from the date of completion of his term of consecutive five years.

Also, all the above companies cannot appoint or re-appoint an audit firm as an auditor for more than
two terms of consecutive five years. Thus, an audit firm is not eligible for re-appointment as an
auditor in the same company for five years from the date of completion of his term of consecutive
five years.

It is noteworthy here that when two or more audit firms have a common partner or partners and
one of these firms complete its two terms, none of these firms is eligible for re-appointment as an
auditor in the same company for five years.

SHAREHOLDERS’ RIGHTS

There are various rights available to a shareholder. Different type of rights has been discussed
below:

1. Appointment of directors

Shareholders play an important role in the appointment of directors. An ordinary resolution is

required to be passed by the shareholders for the appointment. Apart from this, shareholders can
also appoint various types of directors. They are:

 An additional director who will hold the office until the next general body meeting;

 An alternate director who will act as an alternate director for a period of 3 months;

 A nominee director;

 Director appointed in the case of a casual vacancy in the office of any director appointed in a
general meeting in a public company.

Apart from this shareholder also can challenge any resolution passed for the appointment of a
director in the general body meeting.

2. Legal action against directors

Shareholders also can bring legal action against director by the rules laid down in the Companies Act
2013. They are:

 Any act done by the director in any manner which is prejudicial against the affairs of the
company.

 Any act done which is beyond the law or against the constitution.

 Fraud.

 When the assets of the company are being transferred at an undervalued rate.

 When there is a diversion of funds of the company.

 Any act done in a mala fide manner.

3. Appointment of company auditors

Shareholders also have a right to appoint the company auditors. Under Companies Act 2013, the
first auditor of the company is to be appointed by the board of directors. Further the shareholders at
the annual general body meeting at the recommendation of directors and audit committee. The
appointment is generally done for five years and further can be ratified by passing a resolution in the
annual general body meeting.

4. Voting rights

Shareholders also have the right to attend and vote at the annual general body meeting. Every
company registered in India should comply with the provisions of the Companies Act 2013. It is
mandatory for every Indian company to hold an annual general meeting once in every year. The
meeting can be held anywhere at the head office of the company or any other place as given by the
company. At the meeting, there are various mandatory agendas which are to be discussed. These
include the adoption of financial statements, appointment or ratification of directors and auditors
etc.

When a resolution is brought by members of a company then according to companies act 2013 it can
be passed only by the means of voting by the shareholders. Companies Act 2013 recognizes
following types of voting:

 Voting by the showing of hands – Every member present in the meeting has one vote. So, in
this type of voting shareholders vote just by showing of hands.

 Voting done by polling – In this type of voting the chairman or the shareholders’ demand for
a poll. However, in case of differential rights as to voting, a particular class of equity shares
may also have weighted voting rights.

 Voting done by electronic means– every company who has more than 1000 shareholders
has to put up a facility of voting through online means. Every member should be provided
with the means of voting of online.
  Voting by means of postal ballot– any resolution in the meeting can also be passed by
means of a postal ballot.

A shareholder also has a right to appoint proxy on his behalf when he is unable to attend the
meeting. Though the proxy is not allowed to be included in the quorum of the meeting in case of
voting, it is allowed by following a procedure mentioned in the Companies Act 2013.

5. Right to call for general meetings

Shareholders have the right to call a general meeting. They have a right to direct the director of a
company to can all extraordinary general meeting. They also can approach the Company Law Board
for the conduction of general body meeting, if it is not done according to the statutory
requirements.

6. Right to inspect registers and books

As shareholders are the main stakeholders in a company, they have the right to inspect the accounts
register and also the books of the firm and can ask questions about the same if they feel so.

7. Right to get copies of financial statements

Shareholders have the right to get copies of financial statements. It is the duty of the company to
send the financial statements of the company to all its shareholders either in a quarterly or annual
statement.

8. Winding up of the company

Before the company is wound up the company has to inform all the shareholders about the same
and also all the credit has to be given to all the shareholders.

Other Shareholders’ Rights

 When the sale of any material of any company is done then the shareholders should get the
amount which they are entitled to receive;

 When a company is converted into another company then it requires prior approval of
shareholders. Also, all the appointment has to be done according to all the procedures and
also auditors and directors have to be done;

 Right to approach the court in case of insolvency.

Shareholders’ Duties

There are also responsibilities and duties of shareholders which they should perform. Besides several
rights which they have, there exists several duties. They are:

 Shareholders should participate in the general body meetings so that they can see and also
can advise on the matters which they feel is not going good.

 Shareholders should consult on the matters of finance and other topics.

  Shareholders should be in touch with other members of the company so that they can see
the work progress of the company.

Shareholders thereby play an important role in the functioning of a company. They have various
rights which include the appointment of the company’s director, auditor etc., to voting rights and
having a say when the company goes insolvent. With every right, comes a corresponding
responsibility which the shareholder must carry out diligently.

Corporate Governance

Corporate Governance refers to the way a corporation is governed. It is the technique by which
companies are directed and managed. It means carrying the business as per the stakeholders’
desires. It is actually conducted by the board of Directors and the concerned committees for the
company’s stakeholder’s benefit. It is all about balancing individual and societal goals, as well as,
economic and social goals.

Corporate Governance is the interaction between various participants (shareholders, board of

directors, and company’s management) in shaping corporation’s performance and the way it is
proceeding towards. The relationship between the owners and the managers in an organization
must be healthy and there should be no conflict between the two. The owners must see that
individual’s actual performance is according to the standard performance. These dimensions of
corporate governance should not be overlooked.

Corporate Governance deals with the manner the providers of finance guarantee themselves of
getting a fair return on their investment. Corporate Governance clearly distinguishes between the
owners and the managers. The managers are the deciding authority. In modern corporations, the
functions/ tasks of owners and managers should be clearly defined, rather, harmonizing.

Corporate Governance deals with determining ways to take effective strategic decisions. It gives
ultimate authority and complete responsibility to the Board of Directors. In today’s market- oriented
economy, the need for corporate governance arises. Also, efficiency as well as globalization are
significant factors urging corporate governance. Corporate Governance is essential to develop added
value to the stakeholders.

Corporate Governance ensures transparency which ensures strong and balanced economic
development. This also ensures that the interests of all shareholders (majority as well as minority
shareholders) are safeguarded. It ensures that all shareholders fully exercise their rights and that the
organization fully recognizes their rights.

Corporate Governance has a broad scope. It includes both social and institutional aspects. Corporate
Governance encourages a trustworthy, moral, as well as ethical environment.

Benefits of Corporate Governance

1. Good corporate governance ensures corporate success and economic growth.

2. Strong corporate governance maintains investors’ confidence, as a result of which, company

can raise capital efficiently and effectively.
3. It lowers the capital cost.

4. There is a positive impact on the share price.

5. It provides proper inducement to the owners as well as managers to achieve objectives that
are in interests of the shareholders and the organization.

6. Good corporate governance also minimizes wastages, corruption, risks and mismanagement.

7. It helps in brand formation and development.

8. It ensures organization in managed in a manner that fits the best interests of all