How an Indian annual report is organised

In simple terms

An annual report is a company's yearly account of itself to its shareholders. For a listed Indian company it runs to a few hundred pages, and it mixes two very different kinds of material:

• Evidence: the audited financial statements, the notes that explain them and the auditor's reports.
• Narrative: the chairman's letter, the directors' report, management's discussion of the year and the photographs and highlights at the front.

The narrative tells you how management sees the year. The evidence lets you check it.

What the report must contain

A listed company's annual report typically includes:

• audited financial statements, both standalone and consolidated, including a cash flow statement;
• the directors' report;
• a management discussion and analysis (MD&A), either within the directors' report or alongside it;
• a corporate governance report, covering the board, its committees, directors' pay, shareholder meetings and other disclosures;
• for larger listed companies, a business responsibility and sustainability report on environmental, social and governance matters.

Company law and SEBI's rules set out what must be included, and each set of statements, standalone and consolidated, comes with its own auditor's report, usually placed just before it.

A sensible reading order

You do not need to read every page. A first pass that puts evidence before marketing:

Steps 1 to 3 build on the lessons in this path: the three statements, the auditor's report and the notes to the accounts.

Standalone or consolidated?

Most listed companies present both. The standalone statements cover the parent company alone; the consolidated statements combine it with its subsidiaries. For a company with important subsidiaries, start with the consolidated set and use the standalone set to see what sits in the parent. Each set has its own notes and its own auditor's report, so make sure you are reading the matching ones.

Searching the PDF

Annual reports are long, but they are searchable. Some words that lead straight to important disclosures:

• "contingent" for lawsuits, tax disputes and guarantees not on the balance sheet;
• "related party" for dealings with promoters, directors and group companies;
• "pledge" for promoter shares pledged with lenders;
• "qualified", "adverse", "disclaimer" and "emphasis of matter" for anything unusual in the auditor's report;
• "exceptional" and "restated" for one-offs and changes to past figures.

Where to find annual reports

Companies publish annual reports in the investor section of their websites, and listed companies file them with the stock exchanges, so they are also available on the NSE and BSE websites with several years of history. Using the exchange copy also means you can be sure the document is the one actually filed.

Why it matters

The annual report is the most complete and most reliable public source about a listed company, and much of what matters, such as guarantees, related-party dealings and the auditor's concerns, appears nowhere else. Reading it in a disciplined order turns a daunting document into a few hours of focused work, and protects you from taking management's story at face value.

Limitations

• An annual report is published months after the year ends, so it describes the past. Quarterly results and exchange filings fill the gaps.
• Narrative sections are written by the company and are not audited in the same way as the financial statements.
• Disclosure requirements change, and smaller companies may provide less detail than large ones.

Common mistakes

• Starting with the chairman's letter and reading everything else through its optimism.
• Mixing standalone and consolidated figures, or reading the auditor's report for the wrong set.
• Skipping the notes, where many of the important details are.
• Reading one year only. Compare with previous reports to see how the story and the numbers have changed.

Try it yourself

1. Download the latest annual report of a listed company from the NSE or BSE website.
2. Use the contents page to find the consolidated statements, the auditor's report on them, the notes, the MD&A and the corporate governance report. Note the page numbers.
3. Search the document for "contingent" and "related party". Write down the largest amounts you find.
4. Read the chairman's letter last. Does its description of the year match the numbers you have seen?