Producer Company Accounts and Audit Requirements

Producer company accounts and audit are governed by sections 378ZE to 378ZG of the Companies Act, 2013, which sit in Part VI of Chapter XXIA. The Chapter does not replace the general accounting provisions of the Act. It adds to them: a five-item list of books, a compulsory internal audit, and seven additional matters the statutory auditor has to report on.

Producer company accounts and audit: what books does section 378ZE require?

Section 378ZE(1) requires every producer company to keep at its registered office proper books of account with respect to five matters, in clauses (a) to (e):

Clause (e) is a cost-record requirement written into the Chapter itself, and it is conditioned on the activity rather than on turnover. Clause (c) is the item with no direct counterpart in the general books of account provisions in section 128: the instruments of liability the company has executed are a named class of record here.

Sub-section (2) then routes the financial statements: the balance-sheet and profit and loss accounts of the Producer Company shall be prepared, as far as may be, in accordance with the provisions contained in section 129. So the format comes from the general section 129 requirements, qualified by "as far as may be" because a producer company's surplus is distributed as limited return and patronage bonus rather than as an ordinary dividend.

Two other provisions put the same duty on named people. Section 378R(2)(g) makes it a Board power and duty to cause proper books of account to be maintained and to prepare the annual accounts for the annual general meeting with the auditor's report and the replies on qualifications. Section 378W(5)(e) puts on the Chief Executive the function of maintaining proper books, preparing the annual accounts and their audit, and placing the audited accounts before the Board and the annual general meeting.

Who carries out the internal audit?

Section 378ZF is one sentence and it is unconditional. Every Producer Company shall have internal audit of its accounts carried out, at such interval and in such manner as may be specified in articles, by a chartered accountant as defined in clause (b) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949 (38 of 1949).

One point of wording: the section says "in articles", not "in the articles".

Two features of that drafting are worth naming. There is no threshold: the section reaches every producer company whatever its size, where internal audit under the general provisions of the Act is prescribed for classes of company. And the auditor class is fixed by statute, to a chartered accountant as defined in the 1949 Act, so the articles control the interval and the manner but not who may do the work.

What does section 378ZG add to the auditor's report?

Section 378ZG opens without prejudice to the provisions contained in section 143, so the ordinary auditor reporting duties stay intact and these are additional. The auditor shall report on seven further matters relating to the producer company, in clauses (a) to (g):

• (a) The amount of debts due alongwith particulars of bad debts, if any.
• (b) The verification of cash balance and securities.
• (c) The details of assets and liabilities.
• (d) All transactions which appear to be contrary to the provisions of this Chapter.
• (e) The loans given by the Producer Company to the directors.
• (f) The donations or subscriptions given by the Producer Company.
• (g) Any other matter as may be considered necessary by the auditor.

Clause (a) is quoted as printed, including "alongwith". Chapter XXIA uses that spelling five times, in four provisions: section 378ZG(a), section 378ZA(4)(f), section 378ZA(10) twice, and section 378ZD(2). It is quoted rather than modernised in each.

Clauses (d), (e) and (f) each point at a specific Chapter XXIA limit, which is what makes them checkable rather than general.

Clause (e) tracks the proviso to section 378ZK, under which a loan or advance to a director or a director's relative is granted only after approval by the Members in general meeting, and section 378R(2)(j), which lets the Board sanction a loan to a Member not being a director or his relative.

Clause (f) tracks section 378ZH, which permits donations or subscriptions by special resolution for promoting the social and economic welfare of Producer Members, producers or the general public, or the mutual assistance principles, subject to two provisos. The first is an aggregate cap: the donations and subscriptions in any financial year shall not exceed three per cent. of the net profit of the Producer Company in the financial year immediately preceding the financial year in which the donation or subscription was made. The second is an outright bar on any contribution or subscription, direct or indirect, to a political party or for any political purpose, including making available personnel or material.

Clause (d) is the widest of the three, because "contrary to the provisions of this Chapter" reaches anything from a transfer of shares outside the section 378ZD routes to an investment beyond the section 378ZL(4) ceiling of thirty per cent of the aggregate of paid-up capital and free reserves.

What has to be filed, and by when?

The annual cycle is set by section 378ZA, and it has two dates that matter.

The first annual general meeting must be held within a period of ninety days from the date of its incorporation, per sub-section (2), and thereafter not more than fifteen months shall elapse between one annual general meeting and the next, with the Registrar able to permit an extension of up to three months for any special reason, except for the first meeting. That is a different clock from the one the general annual general meeting deadline sets.

The notice calling the annual general meeting must be accompanied, under sub-section (4)(d), by the audited balance-sheet and profit and loss accounts of the company and its subsidiary, if any, together with a report of the Board covering seven items, including the state of affairs, the amount proposed to be carried to reserve, the amount to be paid as limited return on share capital, the amount proposed to be disbursed as patronage bonus, and material changes affecting the financial position between the balance-sheet date and the date of the Board's report. The notice must also carry the text of the draft resolution for appointment of auditors, under sub-section (4)(e).

Then sub-section (10): the proceedings of every annual general meeting alongwith the report of the Board of Directors, the audited balance-sheet and the profit and loss account shall be filed with the Registrar within sixty days of the date on which the annual general meeting is held, with an annual return alongwith the filing fees as applicable under the Act. The spelling "alongwith" is as printed. That filing is where a producer company's accounts become a public record, in the same way the general annual return under section 92 does for other companies.

Failure on this cycle carries a consequence for the Board directly. Section 378Q(1)(d)(i) vacates the office of a director where the producer company has not filed the annual accounts and annual return for any continuous three financial years, which is one of the six grounds in the Board provisions.

Who has to appoint a whole-time secretary?

Section 378X sets a turnover test: every Producer Company having an average annual turnover exceeding five crore rupees or such other amount as may be prescribed in each of three consecutive financial years shall have a whole-time secretary. Sub-section (2) adds that no individual may be appointed unless he possesses membership of the Institute of Company Secretaries of India constituted under the Company Secretaries Act, 1980 (56 of 1980).

Sub-section (3) attaches the consequence: on failure, the company and every officer in default are liable to a penalty of one hundred rupees for every day during which the default continues subject to a maximum of rupees one lakh. A proviso supplies two defences: no penalty shall be imposed if it is shown that all reasonable efforts to comply with the provisions of sub-section (1) were taken or that the financial position of the Company was such that it was beyond its capacity to engage a whole-time secretary.

That is a penalty rather than a fine, which puts it on the adjudication route under section 454 rather than before a court. It sits next to the functions of a company secretary under the general provisions, but the trigger and the excuse clause are specific to this Chapter.

Reading a producer company's accounts pack

Producer company accounts and audit reach the public record through one filing. The Registrar filing under section 378ZA(10) is the document to start from, and four things in it are worth checking against the Chapter. Whether the auditor's report carries the seven section 378ZG items separately from the section 143 report. Whether the Board's report states the amount carried to reserve, the limited return and the patronage bonus, as section 378ZA(4)(d) requires. Whether donations, if any, sit inside the three per cent cap in section 378ZH. And whether the accounts were filed within sixty days of the meeting date, since the financial statements at the ROC carry that date on their face.

Flock reports the filings themselves, each stamped with its date and linked back to the exchange or regulator that published it. What any of it means for you is your call to make.