Ratio Disclosure: Complete Compliance Guide for Small Companies, OPCs, and LLPs under the Companies Act, 2013

 In modern corporate reporting, ratios are not merely analytical indicators—they are statutory transparency instruments.

The Ministry of Corporate Affairs (MCA), through Notification G.S.R. 207(E) dated 24 March 2021, amended Schedule III to the Companies Act, 2013, mandating disclosure of specified financial ratios in company financial statements from 1 April 2021 onwards.

The intent behind this reform is threefold:

• To standardize financial disclosures across entities,

• To enhance comparability and investor confidence, and

• To strengthen corporate governance and audit trail reliability.

Legal Foundation

Primary Statutory Provisions:

• Section 129(1) – Every company’s financial statements shall give a true and fair view and comply with accounting standards notified under Section 133 and the format prescribed in Schedule III.

• Schedule III, Division I (Accounting Standards) / Division II (Ind AS) – Specifies the structure and disclosure requirements of financial statements.

• General Instructions for the Preparation of the Balance Sheet and Statement of Profit & Loss (Clause 6, post-amendment) mandates:

  “The company shall disclose the following ratios. If there is a change of more than 25% as compared to the previous year, the company shall provide an explanation for the same.”

Thus, ratio disclosure is a statutory requirement—not a management choice.

List of Ratios to Be Disclosed

All companies (except LLPs) preparing accounts per Schedule III must disclose the following eleven ratios:

1. Current Ratio

2. Debt-Equity Ratio

3. Debt Service Coverage Ratio (DSCR)

4. Return on Equity Ratio (ROE)

5. Inventory Turnover Ratio

6. Trade Receivables Turnover Ratio

7. Trade Payables Turnover Ratio

8. Net Capital Turnover Ratio

9. Net Profit Ratio

10. Return on Capital Employed (ROCE)

11. Return on Investment (ROI)

If any ratio shows a change of more than 25% compared to the preceding year, the company must explain the variance in its notes to accounts (e.g., due to capital structure changes, business restructuring, or extraordinary income/expense).

---

4. Applicability by Entity Type

Entity Type	Governing Statute	Financial Framework	Ratio Disclosure	Exemption / Notes
Small Company (Sec. 2(85))	Companies Act, 2013	Schedule III, Division I	✅ Mandatory	Exempt only from Cash Flow Statement under Rule 2(1)(t) of the Companies (Accounts) Rules, 2014. Ratio disclosure not exempted.
One Person Company (OPC)	Companies Act, 2013	Schedule III, Division I	✅ Mandatory	No exemption for ratios. Other compliance relaxations (Board meetings, AGMs) continue.
Private/Public Company (non-small)	Companies Act, 2013	Schedule III, Division I or II	✅ Mandatory	No exemption. Required for Ind AS as well as AS-compliant entities.
Limited Liability Partnership (LLP)	LLP Act, 2008	Not governed by Schedule III	❌ Not Mandatory	LLPs prepare Statement of Account & Solvency (Form 8) under Section 34. Ratio disclosure not required.

Interpretation and Law Analysis

(a) Mandatory Nature

• Since Schedule III is a statutory schedule to the Companies Act, non-disclosure of ratios constitutes non-compliance with Section 129(1).

• Under Section 129(7), contravention may attract penalties:

  Company – up to ₹10,00,000;
  Every officer in default – up to ₹1,00,000 or imprisonment up to 1 year, or both.

(b) Applicability Threshold

• Applies to all companies—public or private, listed or unlisted—preparing accounts under Schedule III.

• Small Companies and OPCs, though exempt from cash flow statements, must disclose ratios in notes to accounts.

• LLPs remain outside Schedule III and are not statutorily bound by these disclosure norms.

(c) Ratio Inapplicability Clarification

Where a ratio is not meaningful (e.g., DSCR in a debt-free company), the note should specify:

“Debt Service Coverage Ratio is not applicable as the company has no borrowings during the year.”

This ensures completeness without misleading users of financial statements.

Auditor’s Perspective

Under CARO 2020 (Clause 19) and SA 720 (Revised), auditors are expected to verify and evaluate disclosures, including ratio consistency and reasonableness.

• Incorrect computation or non-disclosure may lead to qualifications or emphasis of matter.

• Auditors may seek management representation on assumptions, formulae used, and justification for >25% variance explanations.

Practical Compliance Guidance

(a) Stepwise Compliance Process

1. Compile ratio list from Schedule III Division I/II.

2. Compute ratios using uniform formulae (refer to ICAI Guidance Note on Schedule III).

3. Compare each ratio with prior year and identify >25% changes.

4. Prepare management explanation for significant variances.

5. Document workings—data source, formula used, and validation check.

6. Include ratio disclosures in Notes to Accounts, preferably after significant accounting policies.

7. Cross-verify consistency with financial statements, cash flow, and auditor’s review.

(b) Key Caution Points

• ⚠ Inconsistent Calculation Basis:
  Ratios must be computed using consistent denominators across years (e.g., average vs. closing balances).

• ⚠ Accounting Policy Changes:
  Policy or Ind AS transition may distort comparability—add disclosure note if applicable.

• ⚠ First-Year Reporting:
  In the first year of incorporation or operation, ratios may not be comparable. Clarify in notes.

• ⚠ Misstatement or Omission:
  Can attract auditor qualification and penalties under Section 129(7).

• ⚠ Unexplained Variations:

  25% ratio change without explanation is a direct non-compliance with Schedule III instructions.

• ⚠ Data Consistency Errors:
  Mismatch between ratios and balance sheet/P&L figures (e.g., inventory vs. turnover) undermines credibility.

• ⚠ Non-Disclosure by Small Companies:
  Despite simplified reporting, ratio omission by small companies or OPCs still violates Schedule III—no automatic exemption applies.

Recommended Best Practices for Professionals

• Document Assumptions: Maintain a Ratio Computation Sheet in audit files with precise formulae and supporting data.

• Use Average Balances: Wherever relevant (e.g., turnover ratios), use average opening and closing figures for accuracy.

• Provide Context: Include concise management commentary explaining business or operational drivers behind ratio changes.

• Internal Review: Implement pre-audit ratio validation to ensure all explanations are ready before financial closure.

• LLPs: Though not required, LLPs may voluntarily adopt ratio disclosures for internal benchmarking and investor presentations.

• Comparative Presentation: For companies with multi-year data, present ratio trends to improve analytical clarity.

Illustrative Example

If the Current Ratio increased from 1.8 (FY 2023–24) to 2.5 (FY 2024–25) (a 38.8% change):

Disclosure Example:
“The Current Ratio has increased due to higher realization of trade receivables and repayment of current borrowings during the year.”

If Debt-Equity Ratio declined significantly:

“The Debt-Equity Ratio reduced due to repayment of term loans and increase in retained earnings.”

Such disclosures satisfy both numerical and narrative transparency requirements.

Penalty and Enforcement Risk

• Legal Reference: Section 129(7) – Penalty for contravention of financial statement requirements.

• Quantum:

  • Company: Fine up to ₹10,00,000

  • Officer in default: Fine up to ₹1,00,000 or imprisonment up to 1 year or both

• Regulatory Risk: Non-compliance may invite adverse auditor comments, qualification in CARO report, or scrutiny during MCA/ROC inspection under Section 206–207.

Quick Reference Summary

Entity Type	Ratio Disclosure	Cash Flow Statement	Statutory Reference	Exemption
Small Company	✅ Yes	❌ Exempt	Sec. 2(85), Sch. III Div. I	Only cash flow exempt
OPC	✅ Yes	❌ Exempt	Sec. 2(62), Sch. III Div. I	No ratio exemption
Private/Public Company	✅ Yes	✅ Required	Sch. III Div. I / II	None
LLP	❌ No	❌ No	LLP Act, 2008	Not governed by Schedule III

Final Professional Takeaway

Ratio disclosure is not a compliance checkbox—it is a credibility statement.
For Small Companies and OPCs, it symbolizes governance parity with larger corporates; for LLPs, though not mandated, voluntary disclosure signals financial discipline.

Professionals should:

• Stay updated with MCA circulars or future exemptions,

• Maintain ratio computation documentation for audit integrity, and

• Treat variance explanations as narrative transparency, not formality.

In today’s compliance ecosystem, clarity is credibility—and ratio disclosure is its most measurable reflection.