Background

Section 128 of the Companies Act, 2013 read with Rule 3 and Rule 4 of the Companies (Accounts) Rules, 2014 prescribes comprehensive requirements for maintenance, retention, inspection, and electronic management of books of account and financial records by companies. These provisions ensure transparency, accountability, and availability of financial information for regulatory compliance and stakeholder oversight.

Compliance Requirement to Maintain Books of Account

1. Mandatory Maintenance (Section 128(1))

Every company shall prepare and keep the following at its registered office:

• • Books of account
  • Other relevant books and papers
  • Financial statements for every financial year

Standard of Record-Keeping

The books must:

• • Give a true and fair view of the state of affairs of the company
  • Include records of the company’s branch offices, if any
  • Explain transactions effected at both registered office and branches

        Accounting Standards (Section 128(1))

Books of account shall be kept:

1. 1. On accrual basis (not cash basis)
   2. According to the double entry system of accounting

Place of Maintenance

Primary Location (Section 128(1))

Default: Registered office of the company

Alternate Location – India (Section 128(1) – First Proviso)

The Board of Directors may decide to keep all or any books at any other place in India.

As per Rule Rule 2A of Companies(Accounts) Rules, 2014 all or any of the books of account and other relevant papers may be kept at such other place in India as the Board of Directors may decide and where such a decision is taken, the company shall, within seven days thereof, file with the Registrar a notice in writing giving the full address of that other place 

Filing Requirement:

• • File notice in writing with the Registrar within 7 days of such decision
  • Notice must contain full address of the alternate location

Electronic Mode (Section 128(1) – Second Proviso)

Books of account or other relevant papers may be kept in electronic mode in the manner prescribed under Rule 3.

Maintenance of Books in Electronic Mode (Rule 3 of the Companies (Accounts) Rules, 2014)

Accessibility Requirement (Rule 3(1))

Books of account and relevant papers in electronic mode shall:

• • Remain accessible in India at all times
  • Be usable for subsequent reference

Audit Trail Mandate (Rule 3(1) – Proviso)

Financial year commencing on or after 1st April 2023

Every company using accounting software for maintaining books of account shall use only such accounting software which has a feature of:

1. 1. Recording audit trail of each and every transaction
   2. Creating edit log of each change made in books of account along with the date when such changes were made
   3. Ensuring audit trail cannot be disabled

Critical Compliance Point: Software without audit trail feature or with disable-able audit trail is non-compliant from FY 2023-24 onwards.

Data Integrity Requirements (Rule 3(2) & (3))

Format Retention (Rule 3(2)): Books shall be retained completely in:

• • The format in which they were originally generated, sent, or received, OR
  • A format which presents accurately the information and remains complete and unaltered

Branch Information Integrity (Rule 3(3)): Information received from branches shall:

• • NOT be altered
  • Be kept depicting what was originally received from branches

Display and Legibility (Rule 3(4))

Information in electronic records must be capable of being displayed in legible form.

Storage and Backup System (Rule 3(5))

Storage Requirements:

• • Proper system for storage, retrieval, display, or printout as deemed appropriate by:
    • Audit Committee (if any), OR
    • Board of Directors
  • Records shall not be disposed of or rendered unusable unless permitted by law

Daily Backup Mandate (Rule 3(5) – Proviso): Backup of books maintained in electronic mode (including those maintained outside India, if any) shall be kept in servers physically located in India on a daily basis.

Critical Requirement: Even if primary records are on cloud servers located abroad, daily backups must be maintained on India-based servers.

Annual Intimation to Registrar (Rule 3(6))

Timeline: At the time of filing financial statements

Information to be Intimated:

1. 1. Name of the service provider
   2. Internet Protocol (IP) address of service provider
   3. Location of service provider (wherever applicable)
   4. For cloud-based maintenance: address provided by service provider
   5. If service provider located outside India: Name and address of the person in control of books in India (Rule 3(6)(e))

Purpose: Ensures Registrar has complete information on electronic record infrastructure and Indian point of contact.

    2.   Branch Office Compliance (Section 128(2))

Deemed Compliance Criteria

A company with branch offices (in India or outside India) shall be deemed compliant if:

1. 1. Branch-Level Maintenance Proper books of account relating to branch transactions are kept at the branch office
   2. Periodic Returns to Head Office The branch office sends proper summarized returns periodically to:

• • • The company’s registered office, OR
    • Other place referred to in Section 128(1)

    3.  Inspection by Directors (Section 128(3))

Books Maintained in India:

• • Open for inspection at registered office or other place in India
  • Available to any director during business hours
  • No special authorization required for directors

Financial Information Maintained Outside India:

• • Copies of such financial information shall be maintained in India
  • Produced for inspection by any director
  • Subject to conditions prescribed in Rule 4

Inspection of Subsidiary’s Books: Inspection shall be done only by person authorized by a resolution of the Board of Directors (Section 128(3) – Proviso)

         Conditions for Inspection of Overseas Financial Information (Rule 4)

Summarized Returns from Overseas Books (Rule 4(1)):

• • Must be sent to registered office at quarterly intervals
  • Maintained at registered office
  • Kept open to directors for inspection

Request for Additional Financial Information (Rule 4(2)): Director shall furnish written request to company setting out:

• • Full details of financial information sought
  • Period for which information is sought

Company’s Response Timeline (Rule 4(3)): Company shall produce financial information to director within 15 days of receipt of written request.

Personal Request Requirement (Rule 4(4)): Financial information must be sought by the director himself (not through power of attorney holder, agent, or representative).

     4.  Assistance During Inspection (Section 128(4))

Officers and other employees shall give the person making inspection all assistance which the company may reasonably be expected to give.

     5.  Retention Period for Books of Account

Standard Retention Period (Section 128(5))

Books of account shall be kept for a period of not less than 8 financial years immediately preceding a financial year.

Components to be Retained:

• • Books of account
  • Vouchers relevant to any entry in such books

For Companies Less Than 8 Years Old: Retain books for all the preceding years.

Condition of Records: Books and vouchers shall be kept in good order.

          Extended Retention During Investigation (Section 128(5) – Proviso)

Where an investigation has been ordered under Chapter XIV (Inspection, Inquiry and Investigation), the Central Government may direct that books be kept for such longer period as it may deem fit.

Penalty & Punishment

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, such managing director, whole-time director in charge of finance, Chief Financial officer or such other person of the company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees