What is an Explanatory Statement?

An explanatory statement is a statement that sets out all such material facts and information that would enable a member to understand the meaning, scope, implications, and repercussions of the item of business to be transacted at the meeting and to take a decision thereon.

Each item of special business to be transacted at a general meeting shall be accompanied by a notice along with the explanatory statement to enable the member to make informed decisions.

As per Section 102 of the Companies Act, 2013, the Explanatory Statement shall specifically state the nature of concern or interest, financial or otherwise, if any, in respect of each item of—

i. every director and the manager, if any;

ii. every other key managerial personnel; and

iii. relatives of the persons mentioned in sub-clauses (i) and (ii);

Any other information and facts that may enable members to understand the meaning, scope, and implications of the items of business., etc.

Further, certain business items governed by specific sections such as the further issue of share capital, and private placement of shares also prescribe for the detailed information to be contained in explanatory statements.

Statements in Specialized and General Businesses

Businesses that are held at a general meeting are divided into two categories that are; specialized and general businesses. The explanatory statement is required to be provided in the case of special businesses only. The following businesses conducted at the annual general meeting should be considered ordinary businesses:

(a) the consideration of financial statements and the board’s and auditors’ reports;

(b) the declaration of any dividend;

(c) the appointment of directors in place of those retiring;

(d) the appointment of, and the fixing of the remuneration of, the auditors.

Another disclosure of interest in which any special business item proposed to be made at a company meeting is related to or affects any other company is compulsory to be mentioned in the notice. In such a case, the explanatory statement will also specify the interest rate of the shareholding of every sponsor, director, manager, and key corporate management staff when the decision is proposed to that other company. Such disclosure is required if such a level of ownership is not less than 2% of the company’s liability.

Content of an Explanatory Statement

The statement to be attached to the notice includes additional disclosures not only of the names of the people involved but also of the status and level of interest of directors, managers, Key Managerial Personnel (KMP), and relatives of directors, managers, and KMP in an explanatory statement is included in every special business in the notice calling general meetings.

The basic idea of giving an explanatory statement is to give shareholders all the information and facts they need to make an informed decision. Any information and facts to enable members to understand the meaning, scope, and implications of business matters and to make a decision therefore will also be provided.

Where any business item means any document, which should be considered at a meeting, the time and place at which that document may be examined shall be specified in the statement below the sub-section.

If any director, promoter, manager, KMP, or any of his or her relatives collects any profits for non-disclosure of interest in a descriptive statement that person will hold that benefit as a trustee of the company and compensate the company for the level of profits earned by them.

Requirement of the Statement of Notice to be Annexed

As per Section 102, every special business to be transacted at a general meeting should contain the following information in the explanatory statement: –

1. Concern or interest, financial or otherwise of every Director, KMP, and their relatives.

2. Any other information and facts that may enable members to understand the meaning, scope, and implication of the proposed resolution.

3. Shareholding interest of every Promoter, Director, and KMP in any other company exceeding 2% of paid-up share capital of such company, if the resolution to be passed relates to that other company.

The exception to the Requirement of Sending Explanatory Statement

There is no need to annex the explanatory statement to the notice of an EGM convened by the requisitionists.
Section 102 shall not apply to private companies if articles of the company provide so.

Consequences of Non-Disclosure or Insufficient Disclosure

Sub-section (4) of section 102 is a new provision whereby as a result of nondisclosure or insufficient disclosure being made in the explanatory statement, any benefit accrues to the promoter, director, manager, key managerial personnel, or relatives thereof, either directly or indirectly, then person to whom such benefit is accrued shall hold such benefit in trust for the company. Such person shall be liable to compensate the company to the extent of such benefit received by him. Such compensation is without any prejudice to any other action which may be taken under the provisions of this Act or any other law.