COMPANIES (AMENDMENT) BILL, 2003
New Changes, New Amendments —
Commendable and Some Amendable
kaushik mukherjee*
May 7 2003, will have special significance in the history of Corporate laws. This was the day when the Companies (Amendment) Bill, 2003 was introduced in the Rajya Sabha by the Hon’ble Finance Minister, Mr. Jaswant Singh.
Though the Bill aims to provide adequate protection to investors, shareholders, creditors, employees and persons appointed by governmental agencies to ensure quick and effective rectification of corporate wrongs, many analysts are of the opinion that the 174 amendments suggested in the new Bill may actually fail to simplify the complicated and already enormous Companies Act.
INDEPENDENT DIRECTORS/ DIRECTORS – MAJOR CHANGES
Various new issues have been raised by this new Amendment. Important among them is the concept of Independent Directors. By insertion of new Section 252A, persons ineligible for appointment as such have been laid down. What is peculiar to this concept of Independent director is the question which arises in the mind as to whether all the Directors appointed by Companies so far were dependant? If yes, will the Companies from now on really and truly be able to appoint Independent Directors without the interference of either the Chairman or other Directors?
As per Companies Act, 1956, Directors are elected by the shareholders in the Annual General Meeting. But do these shareholders really elect Directors they think suitable and capable for the Company’s progress? No, the decision is already made by the Chairman who is unconditionally supported by his Board Members. The resolution passed by the shareholders is just a legal formality. If the new amendment can really change this practice then only can we call the elected Directors Independent.
In a Court of Law, nobody questions whether the judge is independent or dependant, so why should it be so in case of corporates? Thus steps have to be taken where the Board itself is not directed by a single individual occupying position of power, but by the collective force of the shareholders. Only then can the Company prosper for its own good and not only for the prosperity of the persons sitting at its helm.
The concept of Independent Directors' if truly adopted would necessitate major restructuring of a large number of Company Boards. Whether the Companies would really go for it, is a million dollar question? Again it has been proposed in Clause 118 of Section 252, that any Public Company with a paid up capital and free reserves of Rs. 5 crores or turnover of Rs. 50 crores should have atleast 7 Directors majority of whom are independent. Hypothetically these Directors being in majority will be in a position to veto any resolution put forward by the Management. How far it would actually be implemented is the question in most of our minds.
*Company Secretary, Phillips Carbon Black Limited, Kolkata.
In the same clause it has also been provided that if these Companies have more than 7 Directors the Company should have such number of Women Directors as may be prescribed. Categorizing Directors as Men & Women Directors may be highly objectionable to many. Directors are appointed for the development of the Company and its success. Thus eligible persons should be inducted into the Board, whether there are Men or Women Directors is immaterial. What is needed is quality. Too many constraints can only hinder the progress rather than promoting it.
Compulsory training of Directors in an Institute notified by the Central Government, is another new concept which is really welcome. At present majority of Directors proposed to be appointed on the Board are either previously known to the Chairman or any other Member of the Board. Educational Qualifications usually take a back seat , whereas networking and contacts work. Thus with the proposed training that a Director is required to undertake 2 years prior to appointment or within 18 months of appointment under the new amendments would ensure that the Directors are at least at par with the latest developments and well oriented to undertake the high pressure and critical job of that of a Director. However, this too has its flip side. What happens if the Director proposed to be appointed is already well qualified for the role? Should he then also be required to undergo this training? The answer should be no, since for him it is not only wastage of his time but also the precious time and wealth of the Company. Thus the Bill has to clarify this situation. There should be a provision for both possibilities.
Many a times we observed that an individual was a Director of innumerable companies and not able to give any quality input to any of these organizations. With the Amendment Act, 2000, this number was curtailed to 15 companies. Now a further addition has been made in Section 276 whereby a person who is Managing Director (MD) / Whole – time Director (WTD) can also be Director in only 10 other companies. This clause would definitely help in improving the quality of the Director in terms of time, energy and focus they furnish in respect of the Companies in which they are Directors.
Previously there was no retirement age fixed for the Directors. For the first time this issue has been addressed in this new Bill. Under proposed section 280, retirement age has been fixed at 75 years which will go further in favour of Company’s development. As new blood injected into the body rejuvenates a sick individual, similarly, young and energetic Directors appointed on the Board gives a new thought process and focus to the Company. They are bound to bring with them new and fresh ideas that will help in the overall progress and development of the Company.
Thus we may say that various amendments have been proposed in respect of the Company Directors. Some are worth enforcing and many others to be correctly analysed before implementation so as to ensure that the overall situation is much improved as opposed to the present.
INVESTORS PROTECTION
No Company can survive without the support of their investors. Investors are the backbone of any Company. In recent years, it has been observed that numerous companies in their desire to make more and more profits, have ignored the interests of their investors. The stock market scams, insider trading, substantial acquisitions of companies by others whereby the companies are mutually benefited but not the investing public, have opened the eyes of our lawmakers. Many new laws have been enacted to combat this situation, Securities Exchange and Board of India have brought out stringent laws, non – compliance of which may be disastrous not only for the Company but also for its high ranking Officers and Directors who are in corporate law terms known as 'Officer in Default'. In the Companies Act, 1956 too by virtue of this new Bill emphasis has been laid on Investor Protection.
The process of Investor Protection started with the enactment of Companies (Amendment) Act, 1999, whereby the Central Government established the Investor Education and Protection Fund (IEPF) which would be credited with certain unpaid amounts lying with the Company as provided under clauses (a) to (g) of section 205C.
With this Bill of 2003, new Sections 629B and 629C have been inserted for the benefit of investors. As per Section 629B, if a company fails to credit to IEPF (Section 205C), amounts specified u/s 205C, then the Company and every officer of the Company in default shall be punishable with a fine not less than the amount not deposited. In addition the Officer in default shall also be punishable with imprisonment for a period of not less than 3 months which may extend to 2 years. Again it has been provided u/s 629C that the Central Government in the interest of investors or security market may by order on an application made by Judicial Magistrate of first class having jurisdiction, attach bank accounts of any intermediary or any person associated with securities market who in any manner is involved in the violation of any of the provisions of this Act. It has been provided further that only accounts or transactions which relate to the proceeds actually involved in the violation shall be allowed to be attached. Stringent measures have been incorporated for adequate protection of investors. Consistent implementation of these provisions would definitely ensure that investors are safeguarded.
As previously mentioned, in case of non compliance of Section 205C, the officers in default would be liable to be punished in the manner prescribed in that particular section. Section 5 defines the term officer in default which at present includes only MD, WTD, the Manager, the Company Secretary (CS) and the other persons mentioned therein. But with this new amendment the scope of definition has been enhanced to include :
(I)Any other Director in respect of contravention of any of the provisions of this Act which had been committed with his consent, connivance or attributable to his neglect;
(II)Chief accounts officer;
(III)Every employee who is in receipt of remuneration that is more than that drawn by the MD or any WTD and who by himself or together with spouse and dependent children holds not less than 2% of equity share capital of the Company;
(IV)Share transfer agents, bankers, registrars to the issue, merchant bankers, in respect of the issue or transfer of any securities of the Company;
(V)Debenture trustee.
Though the scope of officer in default has been enhanced, whether this will really improve the situation is posed on the minds of analysts. Involving Non - WTD is not advisable since they are not involved in the day to day happening of the Company. Too many restrictions on them would make them over cautious, preventing them to give their best opinion to the Company essential for its growth and development.
The others circumscribed in this fold other than Chief Accounts Officer may not necessarily be officers in default. This will therefore unnecessarily put pressure on the Company which is not desirable. Necessary additions/deletions are required to be made to this definition so that necessary compliance is ensured juxapositioning the advancement of the Company.
CHIEF ACCOUNTS OFFICER
The concept of Chief Accounts Officer (CAO) under Section 215A is welcome. He is required to be a qualified Chartered Accountant or Cost Accountant responsible for proper maintenance of books of accounts and ensure proper disclosure of necessary information in the prospectus or any other offer document. The CAO will also be responsible for proper maintenance of the books of Accounts of the Company, compliance of provisions of Companies Act, 1956 relating to accounts of the Company and preparation of annual accounts. He has to sign the Annual Accounts along with Director and Secretary.
Since these individuals have expert knowledge in the field of Accounts they would be in the right position to ensure compliance, which will ultimately be beneficial for the investors who would be well informed in order to make lucrative investments. Including the CAOs in the gamut of Officer in Default, would ensure required compliance of the provisions of this Bill relating to Accounts thus ultimately ensuring adequate investor protection.
AUDITORS – APPOINTMENT, ROLE & RESPONSIBILITIES
Naresh Chandra Committee Report on Corporate Governance, provided recommendations regarding appointment, role and responsibilities of Statutory Auditors. In their Report they emphasized on the importance of Independent Statutory Auditors. Auditors too should be independent i.e. not under control of the Company’s Chairman or the Board. Only then will it be possible for them to present a true and fair view of the state of Company’s financial position and affairs before its shareholders at the AGM. The changes made in the new Bill are an attempt to provide independence to and a sense of freedom in decision – making by the Statutory Auditors.
Under the new Bill the auditors would be required to provide a written certificate to the Company that their appointment or re-appointment shall be made in accordance with conditions prescribed, before such appointment or re-appointment is made in the AGM. In order to ensure that unbending auditors are not removed or replaced with persons who are more inclined to accept the Board’s decisions whether it presents true picture of the situation or not, the new Bill proposes to amend Section 225(1) by requiring a Special Resolution to be passed for non – reappointment of retiring auditors by the Company. Thus simply put, only retiring auditors can be re– appointed by an ordinary resolution of the shareholders, for others special resolution would be required.
The disqualification proposed to be inserted in Section 226 of the Act is a step towards that direction. No person who has any direct financial interest in the Company or who receives loan or guarantee from or on behalf of the Company or has a business relationship other than as an auditor or has been in employment in the Company or whose relative is in employment in that Company or receives more than 25% of his total income in any financial year as his remuneration from such company would be disqualified from being appointed as an auditor of that company. These would surely help to bring about an independent Company Auditor relationship as envisaged by Naresh Chandra Committee.
Under the new Bill there are certain services which cannot be provided by the Statutory Auditors in respect of their employer companies u/s 226A. Primary among them are:-
—Accounting and book – keeping services relating to the accounting records or financial statements.
—Internal audit services
—Financial information systems design and implementation
—Actual services
—Broker or as intermediary referred to Section 12 of the SEBI Act, 1992
—Out –sourced financial services etc
Again, to enable the auditors to place their views, opinions and qualifications regarding Annual accounts and Balance Sheet in their Auditors’ Report, the Statutory Auditors under the new amendments would be required to read out the Report themselves at the AGM if it contains any adverse remark or qualification. The same shall be forwarded within 30 days of the AGM to the SEBI, Stock Exchanges and the ROC’s office.
SECRETARIAL AUDIT – ROLE OF THE CENTRAL GOVERNMENT
When affairs of the Company are not conducted as per provisions of this Act, then u/s 383B Central Government can order secretarial compliance audit. ‘Secretarial Compliance Audit’ means verification and audit of compliance requirements under various provisions of this Act and identification of non-compliance having a bearing on the conduct of affairs of the company. This audit can be conducted by a Company Secretary (CS) only and that too by one who is appointed by the Central Government for period or periods as may be specified.
The secretarial audit report will be presented by the CS appointed by the Central Government on which necessary action would be taken as per provisions of this Act or any other law for the time being in force.
The expenditure relating to this audit including remuneration of CS would be determined by the Central Government. The amount so determined would be final and will be paid by the Company. In case the Company defaults in making the payment, the same would be recoverable from the Company as an arrear of land revenue.
This is a positive insertion into the Act as it would act as a deterrent for non – compliance by the companies because the consequences for such non – compliance have been made more stringent. So whether the Government actually orders the audit or not, the companies would definitely from now on be more particular regarding correct implementation of the provisions of this Act in order to avoid the secretarial audit as far as possible. This audit can only be ordered if there is non – compliance. So as a preventive measure to ensure compliance this would probably go a long way. The expenses that would have to be incurred/borne in the process of the audit would hopefully prevent the Company from such non – compliance.
The main issues for which secretarial audit can be ordered are :-
1.Non – compliance of provisions of the Act.
2.For any other issues as the Central Government may direct.
Autonomy of such CS would remain since he is not under the control of the Company but has been appointed by the Central Government. He has the same powers and duties as the CS u/s 383A but shall submit his report to the Central Government only and not to the company as in the case of section 383A. This ensures that he is independent in his judgment so that correct view regarding company’s performance and compliance can be presented.
COMPANY SECRETARIES – GROWTH IN STATURE
The Companies (Amendment) Bill, 2003 has opened new avenues for the profession of Company Secretaries. The importance and role of Company Secretaries have been enhanced and clearly enumerated. Section 383A, 383B, 383C are evidence in this respect.
Under Section 383A any company having a paid – up Share capital as may be prescribed shall employ a whole time secretary who shall be a Company Secretary within the meaning of Company Secretaries Act, 1980.
The main functions of the Secretary would be :-