Companies Act Section 395

Companies Act, Section 395: Annual Reports Where One or More State Governments Are Members of Companies

Section 395 of the Companies Act, 2013 sets out the statutory requirements for the preparation and presentation of annual reports in cases where a Government company is owned or controlled only by one or more State Governments, and not by the Central Government.

This provision complements Section 394, which deals with annual reporting in cases where the Central Government is a member of a Government company. 

Together, these sections ensure that all Government companies whether owned by the Central Government, State Governments, or both are subject to similar standards of transparency, accountability, and legislative oversight.

Sub-section (1): Reporting by State Governments When the Central Government Is Not a Member

When the Central Government does not hold any shares or membership in a Government company, the responsibility for ensuring public accountability lies with the State Government(s) that hold ownership or control of that company.

Accordingly, this provision mandates that:

Every State Government which is a member of such a company must ensure that an annual report on the working and affairs of the company is prepared.

Where there is only one State Government that is a member of the company, that single State Government shall cause such a report to be prepared.

The preparation of this annual report must follow the same time frame and process prescribed under Section 394(1), which provides that the report should be prepared within three months of the company’s Annual General Meeting (AGM).

The annual report must include:

Details of the working and affairs of the company during the financial year a copy of the audit report, and the comments or supplementary report of the Comptroller and Auditor-General of India (C&AG), as required under Section 143(6).

After the preparation of the report, the State Government must ensure that it is:

Laid before the House or both Houses of the State Legislature, as the structure of the legislature in that State may require.

Accompanied by the C&AG’s audit report and comments to provide a complete and transparent picture of the company’s financial position and performance.

This ensures that State Legislatures are kept informed of the functioning, financial performance, and governance of Government companies operating under their ownership or control, thereby maintaining public accountability at the State level.

Sub-section (2): Applicability to Government Companies in Liquidation

Sub-section (2) extends the provisions of Section 395 (as well as Section 394) to Government companies that are undergoing liquidation.

This means that even when a Government company is in the process of being wound up or dissolved, the requirements relating to:

Preparation of the annual report, inclusion of the audit report and C&AG’s comments, and presentation before the Legislature, will continue to apply as far as practicable.

The rationale is that, during liquidation, the public interest remains significant because Government funds and assets are still involved. 

Therefore, the activities and progress of liquidation must be disclosed through the same reporting mechanisms to ensure continued transparency and oversight until the company’s affairs are fully wound up.

Purpose and Significance of Section 395

Section 395 is designed to uphold accountability and transparency in Government companies that are wholly or partly owned by State Governments. 

It reinforces the principle that public enterprises whether under Central or State control must be subject to legislative scrutiny to ensure responsible management of public resources.

Key objectives of this provision include:

1. Transparency in governance: Ensuring that the operational and financial affairs of State-owned companies are made public through annual legislative reporting.

2. Legislative oversight: Enabling State Legislatures to review the performance, efficiency, and management of such companies.

3. Uniformity with Central reporting norms: Maintaining a consistent approach between Central and State Government reporting under Sections 394 and 395.

4. Continued accountability during liquidation: Requiring reporting even when the company is in the process of winding up, ensuring that the disposal of assets and settlement of liabilities remain transparent.