Companies Act Section 394

Companies Act, Section 394: Annual Reports on Government Companies

Section 394 of the Companies Act, 2013 lays down the statutory requirements for the preparation and presentation of annual reports on the working and affairs of Government companies. 

This provision ensures transparency, accountability, and legislative oversight over the operations of such companies, which are owned or controlled, wholly or partly, by the Central or State Governments.

The section prescribes a detailed procedure for the preparation, audit, and submission of annual reports, along with the comments of the Comptroller and Auditor-General of India (C&AG), to the appropriate legislative bodies Parliament or State Legislature, as the case may be.

Sub-section (1): Reporting Obligations of the Central Government

When the Central Government is a member or shareholder of a Government company, it holds the responsibility to ensure that an annual report on the functioning and financial performance of that company is prepared and presented. This report must be:

1. Prepared within three months of the company’s Annual General Meeting (AGM).

The AGM is where the audit report and the comments of the C&AG are placed before the shareholders, as mandated under the proviso to sub-section (6) of Section 143 of the Act.

Section 143(6) empowers the C&AG to conduct an audit of Government companies and provide comments or supplementary remarks on the statutory auditor’s report.

2. Laid before both Houses of Parliament the Lok Sabha and the Rajya Sabha as soon as practicable after the preparation of the annual report. The report must be accompanied by:

The Audit Report and the Comments or Supplementary Report of the C&AG provide an independent assessment of the company’s accounts, performance, and compliance.

This ensures that the functioning of every Government company involving Central Government participation is subject to public and parliamentary scrutiny, maintaining transparency in the management of public resources.

Sub-section (2): Reporting Obligations of the State Government

Where a State Government, in addition to the Central Government, is also a member or shareholder of a Government company, the same principles of accountability apply at the State level.

In such cases, the concerned State Government must:

Cause a copy of the annual report, prepared in accordance with sub-section (1), to be laid before the House or both Houses of the State Legislature, as per the structure of that State’s legislature. The report must also be accompanied by:

The Audit Report, and the Comments or Supplementary Report of the Comptroller and Auditor-General of India.

This process ensures that the State Legislature is equally informed about the financial and operational affairs of the company, thus upholding federal accountability when both levels of government have ownership or control in a Government company.

Purpose and Significance of Section 394

The primary objective of this section is to strengthen corporate governance and financial transparency within Government companies. 

These companies are formed with public funds and serve public objectives; therefore, their performance and management must be open to legislative review.

Key purposes include:

1. Ensuring Accountability: The annual report acts as a key instrument for monitoring the performance and compliance of Government companies.

2. Legislative Oversight: By requiring reports to be placed before Parliament and State Legislatures, the law ensures continuous review by elected representatives.

3. Public Transparency: The inclusion of the C&AG’s audit report and comments ensures that any inefficiency, misuse of funds, or deviation from norms is brought to light.

4. Timely Disclosure: The requirement to prepare the report within three months of the AGM ensures prompt reporting and minimizes delays in oversight.

5. Uniform Reporting Structure: The section ensures that both Central and State Governments follow a consistent reporting framework for Government companies.