First Financial Year of a company & first AGM – Issues involved

 P C Agrawal

B.Com., LL.B., CAIIB, FCS

Usually financial year of a company consists of 12 months.  However, in some cases it may not be so.  In case of newlyincorporated company, financial statements have to be prepared from thedate of incorporation of the company till the year-end date of the financial year which may not be of 12 months.  Similarly in case of subsequent change of financial year by the company, the financial year in the year of such change may not necessarily be of 12 months.  In such cases one needs to carefully analyse provisions of Companies Act 1956 and then determine exact period of the financial year depending upon facts of each case.

Meaning of financial year:

Section 2(17) of Companies Act 1956 defines financial year as under:

“financial year” means, in relation to any body corporate, the period in respect of which any profit and loss account of the body corporate laid before it in annual general meeting is made up, whether that period is a year or not:

Provided that, in relation to an insurance company, “financial year” shall mean the calendar year referred to in sub-section (1) of section 11 of the Insurance Act, 1938 (4 of 1938).

It is clear from the definition that a financial year may or may not consist of a year.  Does it mean that the company can fix any period to be its financial year?  Certainly not.  Let us go through relevant provisions of Section 210 of the Act reproduced below:

“(3) The profit and loss account shall relate—

          (a)  in the case of the first annual general meeting of the company, to the period beginning with the incorporation of the company and ending with a day which shall not precede the day of the meeting by more than nine months; and

          (b)  in the case of any subsequent annual general meeting of the company, to the period beginning with the day immediately after the period for which the account was last submitted and ending with a day which shall not precede the day of the meeting by more than six months, or in cases where an extension of time has been granted for holding the meeting under the second proviso to sub-section (1) of section 166, by more than six months and the extension so granted.

(4) The period to which the account aforesaid relates is referred to in this Act as a “financial year”; and it may be less or more than a calendar year, but it shall not exceed fifteen months:

Provided that it may extend to eighteen months where special permission has been granted in that behalf by the Registrar.”

It may be noted here that Section 3(21) of General Clauses Act 1897 defines financial year as under:

“(21) “financial year” shall mean the year commencing on the first day of April;”

However, for the purpose of Companies Act 1956 definition given in the Companies Act will prevail over the definition given in General Clauses Act.

Further, it will also be relevant to go through Section 166(1) of the Companies Act which reads as under:

“(1) Every company shall in each year hold in addition to any other meetings a general meeting as its annual general meeting and shall specify the meeting as such in the notices calling it; and not more than fifteen months shall elapse between the date of one annual general meeting of a company and that of the next :

Provided that a company may hold its first annual general meeting within a period of not more thaneighteen months from the date of its incorporation; and if such general meeting is held within that period, it shall not be necessary for the company to hold any annual general meeting in the year of its incorporation or in the following year :

Provided further that the Registrar may, for any special reason, extend the time within which any annual general meeting (not being the first annual general meeting) shall be held, by a period not exceeding three months.”

On going through the above provisions we find that the Act provides for the following basic rules:

(i)     In the case of first AGM, gap between last day of the financial year and the date of AGM should not exceed nine months.

(ii)    In the case of any subsequent AGM, gap between last day of the financial year and the date of AGM should not exceed six months without the permission of the ROC and nine months with the permission of the ROC.

(iii)    The maximum period of financial year can be fifteen months.  However, with the permission ofthe ROC it can be extended upto eighteen months.

One has to comply with both the Sections and cannot ignore one Section while following another one.  Hence AGM can be held on a date which is earlier of the two dates – one as per Section 166 and another as per Section 210.

What can be maximum period of first financial year?

Section 210 provides that normally a financial year can consist of not more than 15 months.  However, with the permission of the Registrar it can be extended upto 18 months.  It is true for first financial year also.  Now the question arises how to decide period of first financial year of a company?  For this, one needs to take following steps:

Step-I:  Decide year-end date of financial year of the company.

It may be noted that Companies Act 1956 does not mandate a company to follow a uniform accounting year as has been done in case of Income Tax Act 1961.  In case of Income Tax Act 1961 a company has to get its accounts prepared and audited as at the end of 31^st March every year.  However, under Companies Act 1956 the company is free to follow any accounting year of its choice.  Most of the companies close their books on 31^st March every year to take care of requirements of both the Acts.  However, some companies due to various reasons still close their books on 30^th June or 31^st December and so on.   

Step-II:  Work out options available considering provisions of Sections 166 and 210:

All companies can have the period from date of incorporation of the company to the immediately following year-end date as the first financial year of the company without going into details.  However, if such financial year is too short, company may not like to get the accounts audited for such short period.  In such situation one has to find out whether the company can choose to have next subsequent year-end date as the last day of the first financial year considering the provisions of Sections 166 and 210 of the Act.

Power of ROC to extend time for holding AGM:

On a combined reading of Sections 166 and 210 of Companies Act 1956 it becomes clear that the first AGM must be held within 18 months from date of incorporation and within 9 months from close of the financial year.  An AGM other than the first AGM should be held on the earliest of the following dates:

a)      15 months of the date of last AGM:

b)      The last day of the calendar year;

c)       6 months from the close of the financial year.

However, ROC can grant extension of time for holding AGM u/s 166(1) upto 3 months.  Here a question arises whether ROC has power to grant extension for holding subsequent AGM u/s 210 within 9 months from the close of the financial year or not since the wordings of the Section indicate that extension can only be granted u/s 166 and not u/s 210.  It has been clarified by the Department that in cases where the company experiences genuine difficulty in holding its AGM within 6 months of the close of the financial year though it can hold it within the time limit prescribed u/s 166, the Registrar can on merits of each case, allow extension u/s 166, even though the period prescribed u/s 166 are not likely to be exceeded, so that the company can take advantage of the extension and is enabled to hold its AGM beyond the period of 6 months prescribed u/s 210 and upto 9 months of the financial year. (Department’s File No.8/16(1)/61-PR).

Here we must be clear as to what is meant by the words “month” and “year” used in the Act.  Different types of calendars are being used in the country which carry different meanings of these words.  These words have not been defined in the Companies Act and as such as per general principles of interpretation we have to refer General Clauses Act 1897.  Section 3 of General Clauses Act defines these words as under:

“(35) “month” shall mean a month reckoned according to the British calendar;

…

(66) “year” shall mean a year reckoned according to the British calendar.”

Hence we have to follow British calendar for the meaning of the words “month” and “year” used in the Companies Act 1956.

Illustrations:

The legal provisions could be easily understood with the help of a few illustrations.

Illustration-1:  Company having 31^st March as its year-end date:

It can be explained in the form of table as under:

No.	Date of incorporation falls between	Financial year-end date without the approval of ROC(within 15 months of incorporation)		Extended financial year-end date with the approval of ROC(within 18 months of incorporation)	Last date of first AGM as per various options of financial year if not a public holiday (being earlier of two dates as per Sections 166 and 210)
		Option-I	Option-II	Option-III	Option-I	Option-II	Option-III
1	1/1/2012 to 31/3/2012	31/3/2012	31/3/2013	N.A.	31/12/2012 [Sec.210]	18 months from incorpo-ration [Sec.166]	N.A.
2	1/4/2012 to 30/6/2012	31/3/2013	N.A.	N.A.	18 months from incorporation [Sec.166]	N.A.	N.A.
3	1/7/2012 to 30/9/2012	31/3/2013	N.A.	N.A.	31/12/2013 [Sec.210]	N.A.	N.A.
4	1/10/2012 to 31/12/2012	31/3/2013	N.A.	31/3/2014	31/12/2013 [Sec.210]	N.A.	18 months from incorpo-ration [Sec.166] (See Note-1 below)

Thus it is clear from the above table that a company incorporated in the first quarter of the year 2012 and wishing to close its books on 31^st March can close the books either on 31^st March 2012 or on 31^st March 2013 since both dates fall within prescribed period of 15 months from date of incorporation.  A company incorporated in any other quarter of the year can close its books only on 31^st March 2013.  Only a company incorporated in the last quarter of the year can close its books on 31^st March 2014 with special permission of ROC since this date will fall within extended period of 18 months from the date of incorporation of the company.  A company incorporated in second or third quarter of the year does not have any other option since next possible date, i.e. 31^st March 2014 will be beyond 18 months of date of incorporation.

Illustration-2:  Company having 30^th June as its year-end date:

It can be explained in the form of table as under:

No.	Date of incorporation falls between	Financial year-end date without the approval of ROC (within 15 months of incorporation)		Extended financial year-end date with the approval of ROC (within 18 months of incorporation)	Last date of first AGM as per various options of financial year if not a public holiday  (being earlier of two dates as per Sections 166 and 210)
		Option-I	Option-II	Option-III	Option-I	Option-II	Option-III
1	1/1/2012 to 31/3/2012	30/6/2012	N.A.	30/6/2013	31/3/2013 [Sec.210]	N.A.	18 months from incorpo-ration [Sec.166] (See Note-1 below)
2	1/4/2012 to 30/6/2012	30/6/2012	30/6/2013	N.A.	31/3/2013 [Sec.210]	18 months from incorpo-ration [Sec.166]	N.A.
3	1/7/2012 to 30/9/2012	30/6/2013	N.A.	N.A.	18 months from incorpo-ration [Sec.166]	N.A.	N.A.
4	1/10/2012 to 31/12/2012	30/6/2013	N.A.	N.A.	31/3/2014 [Sec.210]	N.A.	N.A.

Thus it is clear from the above table that a company incorporated in the second quarter of the year 2012 and wishing to close its books on 30^th June can close the books either on 30^th June 2012 or on 30^th June 2013 since both dates fall within prescribed period of 15 months from date of incorporation.  A company incorporated in first quarter of the year can close its books only on 30^thJune 2012.  Similarly, a company incorporated in third or fourth quarter can close its books only on 30^th June 2013.  Only a company incorporated in the first quarter of the year can close its books on 30^th June 2013 with special permission of ROC since this date will fall within extended period of 18 months from the date of incorporation of the company.  A company incorporated in third or fourth quarter of the year does not have any other option since next possible date, i.e. 30^th June 2014 will be beyond 18 months of date of incorporation.

Illustration-3:  Company having 31^st December as its year-end date:

It can be explained in the form of table as under:

No.	Date of incorporation falls between	Financial year-end date without the approval of ROC (within 15 months of incorporation)		Extended financial year-end date with the approval of ROC (within 18 months of incorporation)	Last date of AGM as per various options of financial year if not a public holiday  (being earlier of two dates as per Sections 166 and 210)
		Option-I	Option-II	Option-III	Option-I	Option-II	Option-III
1	1/1/2012 to 31/3/2012	31/12/2012	N.A.	N.A.	18 months from incorpo-ration [Sec.166]	N.A.	N.A.
2	1/4/2012 to 30/6/2012	31/12/2012	N.A.	N.A.	30/9/2013 [Sec.210]	N.A.	N.A.
3	1/7/2012 to 30/9/2012	31/12/2012	N.A.	31/12/2013	30/9/2013 [Sec.210]	N.A.	18 months from incorpo-ration [Sec.166] (See Note-1 below)
4	1/10/2012 to 31/12/2012	31/12/2012	31/12/2013	N.A.	30/9/2013 [Sec.210]	18 months from incorpo-ration [Sec.166]	N.A.

Thus it is clear from the above table that a company incorporated in the last quarter of the year 2012 and wishing to close its books on 31^st December can close the books either on 31^st December 2012 or on 31^st December 2013 since both dates fall within prescribed period of 15 months from date of incorporation.  A company incorporated in any other quarter of the year can close its books only on 31^st December 2012.  Only a company incorporated in the third quarter of the year can close its books on 31^st December 2013 with special permission of ROC since this date will fall within extended period of 18 months from the date of incorporation of the company.  A company incorporated in first or second quarter of the year does not have any other option since next possible date, i.e. 31^st December 2013 will be beyond 18 months of date of incorporation.

Note-1:

In the above illustrations in cases where financial year is extended to 18 months with the approval of ROC, first AGM will have to be held within 18 months of incorporation of the company.  In case the company is incorporated in early days of the relevant quarter, the company may not be in a position to give 21 clear days notice for convening the AGM.  In such a situation, subject to the provisions of the Articles of Association of the company, AGM will have to be convened at shorter notice with the consent of members u/s 171(2) of the Act.

Definition of financial year in Companies Bill 2011:

It is proposed to introduce concept of uniform financial year in Companies Act also.  Clause 2(41) of Companies Bill 2011 as introduced in Lok Sabha defines financial year as under:

“financial year”, in relation to any company or body corporate, means the period ending on the 31st day of March every year, and where it has been incorporated on or after the 1st day of January of a year, the period ending on the 31st day of March of the following year, in respect whereof financial statement of the company or body corporate is made up:

Provided that on an application made by a company or body corporate, which is a holding company or a subsidiary of a company incorporated outside India and is required to follow a different financial year for consolidation of its accounts outside India, the Tribunal may, if it is satisfied, allow any period as its financial year, whether or not that period is a year:

Provided further that a company or body corporate, existing on the commencement of this Act, shall, within a period of two years from such commencement, align its financial year as per the provisions of this clause.

We have been waiting for new Companies Act for years together.  Let us hope this Bill gets converted into an Act.

Conclusion:

Company is likely to face prosecution in case provisions of Sections 166 and 210 of the Act are not complied with in true spirit.  Company Secretary plays a vital role in advising the Board of Directors of the company properly in fixation of financial year, particularly the first financial year thereby avoiding prosecution for unintentional default.

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Note: The writer is working as Company Secretary at Aurangabad (Maharashtra) & can be reached at agrawal.pc@baglagroup.com.