Books of account and Registrar inspection (ss.128, 206): where books are kept, who may inspect, and what triggers a probe

The books sit on an accountant's laptop, a branch sends WhatsApp summaries, and a director who asks questions is told the records are "with the auditor". Sections 128 and 206 of the Companies Act 2013 speak to all three situations. Books are kept at the registered office (or another place in India the board decides, with notice to the Registrar), on the accrual basis and the double-entry system. Every director may inspect them during business hours. Branch offices send proper summarised returns. And the Registrar can ask for explanations, call for further books and, on any person's representation, inquire into whether the company is being run for a fraudulent or unlawful purpose.

Legal basis: Companies Act 2013, ss.128 and 206.

Where the books live: registered office, another place in India, or electronic mode

Section 128(1) sets the base rule. Every company must "prepare and keep at its registered office books of account and other relevant books and papers and financial statement for every financial year which give a true and fair view of the state of the affairs of the company, including that of its branch office or offices, if any". The books must "explain the transactions effected both at the registered office and its branches" and must "be kept on accrual basis and according to the double entry system of accounting" (s.128(1), Companies Act 2013). The standard is substantive. A cash-basis ledger or a single-entry register does not meet it, however neatly it is kept.

Two departures are allowed, both in provisos to s.128(1).

Another place in India. The books may be kept "at such other place in India as the Board of Directors may decide". The company must then, "within seven days thereof, file with the Registrar a notice in writing giving the full address of that other place". The seven days run from the board's decision, so the notice should be prepared at the same board meeting that decides to move the books.
Electronic mode. The company "may keep such books of account or other relevant papers in electronic mode in such manner as may be prescribed". So electronic books are lawful, but the manner is set by the rules made under the Act. Before moving the accounting system to the cloud or to a vendor's server, read the current Companies (Accounts) Rules, 2014 as amended and confirm the location and backup conditions against the text in force.

Branch offices

A company with a branch office "in India or outside India" is treated as having complied with s.128(1) "if proper books of account relating to the transactions effected at the branch office are kept at that office and proper summarized returns periodically are sent by the branch office to the company at its registered office or the other place" (s.128(2), Companies Act 2013). Two things must both be true: the branch must keep proper books of its own, and it must send summarised returns periodically. A chat message with a total is neither a book nor a return.

Who may inspect: any director, during business hours

The books "maintained by the company within India shall be open for inspection at the registered office of the company or at such other place in India by any director during business hours" (s.128(3), Companies Act 2013). The section does not ask for a reason and does not make the right depend on board permission.

Three further points sit in the same sub-sections.

Information held abroad. For financial information "maintained outside the country, copies of such financial information shall be maintained and produced for inspection by any director subject to such conditions as may be prescribed" (s.128(3)). Keeping the only copy offshore does not defeat a director's right.
Subsidiaries. The first proviso to s.128(3) says inspection "in respect of any subsidiary of the company shall be done only by the person authorised in this behalf by a resolution of the Board of Directors". A holding-company director therefore needs a board resolution to inspect a subsidiary's books.
Assistance. Where an inspection is made under s.128(3), "the officers and other employees of the company shall give to the person making such inspection all assistance in connection with the inspection which the company may reasonably be expected to give" (s.128(4)). Telling a director that the records are with the auditor, or that the accountant is on leave, is hard to square with this duty.

How long to keep the books: eight financial years, with vouchers

Section 128(5) requires the books of account "relating to a period of not less than eight financial years immediately preceding a financial year" to be kept, together with "the vouchers relevant to any entry in such books of account", and "in good order". A company in existence for fewer than eight years keeps all preceding years. The proviso adds that where an investigation has been ordered under Chapter XIV, "the Central Government may direct that the books of account may be kept for such longer period as it may deem fit".

The rule covers vouchers as well as ledgers: an eight-year ledger with no invoices or bank advices behind the entries is not compliance.

Who is liable for a books failure, and what the fine is

If "the managing director, the whole-time director in charge of finance, the Chief Financial Officer or any other person of a company charged by the Board with the duty of complying with the provisions of this section, contravenes such provisions", that person "shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees" (s.128(6), Companies Act 2013). In figures, that is ₹50,000 to ₹5,00,000.

Older commentary may say the penalty includes imprisonment of up to one year. That text has been changed: the words "with imprisonment for a term which may extend to one year or" and "or with both" were omitted by the Companies (Amendment) Act, 2020 (Act 29 of 2020, s.24), with effect from 21 December 2020. The section as it stands now provides for a fine only. The liability is personal to the named officers. It does not fall on the company's shareholders, and the board should record in a resolution who has been charged with the s.128 duty.

The Registrar's powers under section 206

Section 206 gives the Registrar a ladder of powers, from a request for information up to an inquiry.

Step 1: information or documents. On scrutiny of a filed document, or on information received, the Registrar who thinks further information or documents are necessary "may by a written notice" require the company to furnish an explanation in writing or to produce documents "within such reasonable time, as may be specified in the notice" (s.206(1)). The company and its officers concerned must furnish the information "to the best of their knowledge and power" within the time specified or extended (s.206(2)). Where the information relates to a past period, officers who were with the company then may be called on by written notice to furnish what they know.

Step 2: further books, with reasons recorded. If no explanation comes in time, or the Registrar finds it inadequate, or is satisfied "that an unsatisfactory state of affairs exists in the company and does not disclose a full and fair statement of the information required", he may "by another written notice, call on the company to produce for his inspection such further books of account, books, papers and explanations as he may require at such place and at such time as he may specify" (s.206(3)). The proviso is important: "before any notice is served under this sub-section, the Registrar shall record his reasons in writing for issuing such notice".

Step 3: inquiry on any person's representation. Under s.206(4), the Registrar may act where he is satisfied "on the basis of information available with or furnished to him or on a representation made to him by any person" that the company's business is being carried on "for a fraudulent or unlawful purpose or not in compliance with the provisions of this Act", or that "the grievances of investors are not being addressed". The procedure is:

the Registrar informs the company of the allegations by a written order;
he calls for information or an explanation on the matters specified in the order, within the time he sets;
he carries out such inquiry as he deems fit, "after providing the company a reasonable opportunity of being heard".

The first proviso lets the Central Government direct the Registrar, or an inspector it appoints, to carry out the inquiry. The second proviso is the heaviest: where the business "has been or is being carried on for a fraudulent or unlawful purpose, every officer of the company who is in default shall be punishable for fraud in the manner as provided in section 447".

Step 4: inspection by an inspector or another authority. The Central Government may direct inspection of the company's books and papers by an inspector it appoints (s.206(5)). It may also, by general or special order, authorise "any statutory authority to carry out the inspection of books of account of a company or class of companies" (s.206(6)).

Penalty for non-cooperation. If the company fails to furnish information or explanation, or to produce a document required under s.206, "the company and every officer of the company, who is in default shall be punishable with a fine which may extend to one lakh rupees" and, for a continuing failure, with an additional fine "which may extend to five hundred rupees for every day after the first during which the failure continues" (s.206(7)). That is up to ₹1,00,000, plus up to ₹500 for each day after the first.

When the Registrar or an inspector calls for books under s.206, s.207 places a duty on every director, officer or employee to produce the documents and furnish the statements and explanations required. The books that s.128 requires to be in good order are therefore the books that will be asked for.

A worked scenario

A nominee director suspects that funds are being diverted through a branch. She writes to the finance head asking to inspect the branch books and the summarised returns. Management replies that the records are with the auditor and cannot be released.

She has a right under s.128(3) to inspect during business hours at the registered office or the notified place, and the officers must give assistance under s.128(4).
The refusal does not remove the right. She may also make a representation to the Registrar, which s.206(4) allows "any person" to do, attaching the correspondence.
If the Registrar is satisfied that the s.206(4) conditions are met, a written order setting out the allegations follows, and the company gets a hearing.
If explanations are inadequate, the Registrar may call for further books under s.206(3) after recording his reasons.
Separately, if the company cannot produce eight years of books with vouchers, the officers named in s.128(6) face the fine of ₹50,000 to ₹5,00,000. If the Registrar's inquiry establishes a fraudulent purpose, defaulting officers face s.447.

What a books file should contain

A file that answers both a director and the Registrar should contain:

the board resolution fixing where the books are kept, and, if it is not the registered office, the notice filed with the Registrar within seven days;
a note of the accounting basis (accrual, double entry) and, if books are electronic, the manner followed under the prescribed rules;
for each branch, the branch books and the summarised returns received, with dates;
a voucher archive covering at least eight financial years, indexed so that a voucher can be traced from the ledger entry;
a log of director inspection requests and the assistance given;
a correspondence file for any Registrar notice under s.206, with the recorded reasons where s.206(3) was used, the reply and proof of dispatch.

Review the file at least once a year, not after a notice arrives.

What to do now

Next step: confirm in writing where the books actually are today. If it is not the registered office, check that the board has decided it and that the address notice went to the Registrar (s.128(1), first proviso).
Deadline: the notice to the Registrar is due within seven days of the board's decision to keep books at another place in India (s.128(1), first proviso). Where a Registrar notice has arrived, reply within the time it specifies (s.206(1), s.206(3)).
Consequence: the officers named in s.128(6) face a fine of ₹50,000 to ₹5,00,000. Failure to respond under s.206 costs the company and each defaulting officer up to ₹1,00,000, plus up to ₹500 a day after the first day (s.206(7)).

Have a CA review your facts before you act or file.

Frequently asked questions

Where must books of account be kept?
At the registered office, or at another place in India the board decides, with a written notice of its full address to the Registrar within seven days. Electronic books are allowed in the prescribed manner (s.128(1), Companies Act 2013).

Can any director inspect the books?
Yes. Books maintained in India are open to "any director during business hours" at the registered office or the other place. Inspection of a subsidiary's books needs a board-resolution authorisation, and officers must assist (s.128(3) and (4)).

How long must books and vouchers be kept?
For not less than eight financial years immediately preceding the current year, with the relevant vouchers, in good order. The Central Government may direct a longer period where a Chapter XIV investigation is ordered (s.128(5)).

Who is personally liable for a failure under s.128?
The managing director, the whole-time director in charge of finance, the CFO, or any other person charged by the Board with the duty. The fine is ₹50,000 to ₹5,00,000 (s.128(6)).

Is imprisonment still possible under s.128(6)?
Not under the current text. The words providing for imprisonment and "or with both" were omitted by the Companies (Amendment) Act, 2020 with effect from 21 December 2020.

Can anyone trigger a Registrar inquiry?
The Registrar may act on information available to him or on "a representation made to him by any person", where the s.206(4) conditions are satisfied. He first informs the company of the allegations by written order and gives a hearing.

Must the Registrar give reasons for a further-books notice?
Yes. Before serving a notice under s.206(3), "the Registrar shall record his reasons in writing for issuing such notice".

What does non-cooperation with the Registrar cost?
A fine of up to ₹1,00,000, and for a continuing failure up to ₹500 for every day after the first, on the company and every officer in default (s.206(7)).

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