FLAWS IN FORM 32: WITH RESPECT TO APPOINTMENT OF A COMPANY SECRETARY

Present scheme of the Companies Act, 1956 treat wrong doing principal officers of a company as “officer who is in default”. The Act under Section 5 explicitly lists “Officer who is in default”. This list, which looks like a most wanted list of police department, really cast numerous responsibilities on these officers. Presently, the Secretary of the company seems to be only professional listed herein. As all other persons, may or may not be professionally qualified, are business person and technical persons with only average person knowledge of his legal responsibilities. This section not only cast on the secretary practically all legal responsibilities of the company’s legal administration but also put him in much bigger shoes.

Due to the confidence put on the face of profession of Company Secretaries, the Companies Act legally binds certain companies to have Company Secretaries. The company, who has a Secretary on its pay –roll, has regular and complete access to the advice of legal, financial and managerial expert. Same time, legislators do not want to over – burden Corporate India with yet another cost of legal and regulatory compliance. Therefore, they identified paid – up capital of a company as basis for compulsion for appointment of whole – time secretary of the company. Section 383A read with the Companies (Appointment and Qualification of Secretary) Rules, 1988 as amended by the Companies (Appointment and Qualification of Secretary) Amendment Rules, 2009 puts companies in three separate classes:

1. Companies required to have Whole time Secretary on its pay – roll, such Secretary must be a qualified ‘Company Secretary’ and member of the Institute of Company Secretary of India,
2. Company have option to have a whole – time Secretary on its pay – roll or obtaining a compliance Certificate from a Company Secretary in whole time practice, and
3. Companies compulsorily require a Compliance Certificate from a Company Secretary in whole – time practice. (Here, we may note there is no option for part – time practice either.)

Against the popular belief, term ‘Secretary’ is a dubious term under the Companies Act. Section 2(45) define ‘Secretary’ as a ‘Company Secretary’ within the meaning of clause (c) of sub – section of Section 2 of the Company Secretaries Act, 1980 and includes any other individual possessing the prescribed qualifications and appointed to perform the duties which may be performed by a secretary under the Act and any other ministerial and administrative duties. The section 2(45) make it apparent that ‘Secretary’ need not always be a ‘Company Secretary’. To be more unambiguous, one have to study the companies (Appointment and qualification of Secretary) Rules, 1988, which was amended on 13 April 1993 [GSR 372 (E)], 11 June 2002 [GSR 419 (E)], 14 October 2003 [GSR 804 (E)] and 5 January 2009 [GSR 11(E)]. These rules, in general, effectively classify ‘Secretary’ in employment of a company into ‘Whole – time Company Secretary’ and other ‘Secretary’.

Rule 2 (1) of these Rules put a criteria based on paid up capital of the company for appointment of whole – time secretary. The figure herein kept changing depending upon the pressure from corporate against compulsory appointment of such ‘government agent’ on the pay – roll of the company. Presently, every company having a paid – up share capital of not less than rupees Five Crores shall have a ‘whole – time Secretary’. This whole –time Secretary must be a member of Institute of Company Secretaries of India. In laymen’s language, such company should employ a whole – time company secretary.

The ‘Secretary’, who is not required to be a ‘Company Secretary’, may have any one or more qualification specified in sub – rule (4) of Rule 2 of these Rules. There are 10 qualification listed in this sub – rule ranging from professional qualifications to post – graduate diploma holders. Whenever paid – up capital of the company increase to the amount fixed for compulsory appointment of ‘whole – time Secretary’ under sub – rule (1) of Rule 2 of these Rules, the company is bound to appoint a ‘whole – time Company Secretary’ as mentioned above.

Under the scheme of the Companies Act, there are lots of legal and regulatory compliances to follow. Generally these compliances ask for timely reporting several corporate actions. Earlier companies have to file many forms for such reporting purpose manually. With the launch of e – governance module of Ministry of Corporate Affairs, MCA21 portal, filing of these compliance reporting became much efficient and cost-effective. Generally these e – forms have in – built error detecting mechanism and guidance process.  This minimizes chances of errors and unintentional wrong reporting or misrepresentation by the companies. With the success of MCA21 initiatives, the ministry recently started to put these e – form on the records only on the basis of these in – built error detecting mechanism and guidance process and on the basis of basis of statement of correctness given by the filing company. The MCA21 system offer several information reported by a company free of cost to any visitor of its web – site and other legally permitted information on payment of inspection fee as prescribed.

For the purpose of appointment of a ‘Secretary’ under the Companies Act, a company should have to file e-From 32. This is first and only reporting by the company of the appointment of a ‘Secretary’ of the company. E-Form 32 comes with inherent errors. Unlike  many other forms, this Form 32 do not mention authorized Capital of the company and does not bother about Paid – up Capital of the company. Hence, first check – point regarding the requirement for appointment of ‘Secretary’ is completely missing in the form. Secondly, the e-form just ask, ‘whether the Secretary is a member of ICSI’. In case, filing person fill ‘NO’, it never give message regarding requirement of ‘whole – time Secretary’ even if paid – up capital is more than specified limit. Hence, any illicit company can file e-form 32 regarding a ’Secretary’ who may or may not be fulfill requirement of said Rules. Prima – facie, in e-Form 32, Basic idea of in built error check mechanism is completely missing. Present reporting system makes it possible to appoint even an illiterate person as a ‘Secretary’ of a company. After recent amendment into the MCA21 System and this e- form, this e-form comes with a message that this e-Form has been taken on the file maintained by the registrar of companies through electronic mode and on the basis of statement of correctness given by the filing company. Hence, this e-form goes not only to official record of the Registrar of Companies without any scrutiny but also on its e-governance web – site. Anyone can check list of Directors and Secretary of a company on MCA21 portal. Unfortunately, where paid – up capital of the company is more than prescribed limit for appointment of ‘whole – time Secretary’, one can ‘safely’ presume that such ‘secretary’ is ‘whole – time Secretary’ with prescribed qualification as ‘Company Secretary’.

Further, e- governance portal of MCA21 require that any e-form should be digitally signed only by persons whose digital signatures has already been registered to the MCA21 portal. There is slightly different process to register digital signature of director and of Secretary. One pre – perquisite is, there must be approved form 32 for appointment of such person in the record of MCA21. Now, for registration of digital signature of a ‘Secretary’ it asks for PAN number of the person, never membership number of Institute of Company Secretaries of India. This means any ‘secretary’ whether it is ‘whole – time Secretary’ or an other ‘Secretary’ can register his digital signature and sign any e-form for a company.

It is not that companies do not report increase in their paid – up capital. Companies report increase of its paid – up capital at the time of any allotment of new shares (e-Form 2 and e-From 3) from time to time and annually by filing its Annual Accounts (e-form 23AC) and Annual Return (e – From 20B). It seems, these e- forms have no synchronization with form 32. This failure to synchronization of these two set of e- forms make timely detection of any fraud and misrepresentation an almost impossible task.

Now, we may also consider manual era of MCA system. At the time of transition from manual to digital system, MCA ask all ‘Secretaries’ in employment to file their DIN3 form. Unfortunate this form also did not have any proper in – built error detecting mechanism and guidance process.

Until now, we may discuss a real life situation (a case study) which may quietly be possible. In year January 2007, a new company having paid – up capital less than Rupees twenty-five Lakh appointed a Law graduate as its Secretary. Being a capital-intensive sector, in October 2007, company increased its paid – up share capital to say rupees Two Crores and Fifty Lakhs.  As per the proviso to Rule 2 (4), Company require to appoint a whole – time Secretary within one year from increase of its paid – up share capital to more than Rupees Two Crores. With fear of loss of job, present secretary of the company never told the management about the legal requirement.  He studied well about the MCA21 system and know that there is no in – built system to challenge his continuation in the office of ‘Secretary’ of the company, unless someone complaint against him or his company. He may be fortunate enough; the ministry came with new amendment with effect from March 2009. Now, he may continue into his office as for his company, it is not compulsory to have a whole time company secretary.  Once again in June 2010, his company increased its paid – up share capital to Rs. Ten Crores.

In the given case study, the company and its said secretary stands at the wrong side of law twice but never to be caught. All stakeholders suffer due to failure of MCA21 system.

In case study mentioned above, following non – compliances may be happened on the part of company and the person in office of the ‘secretary’:

1. Violation of Section 383A of the Act read with Rule 2(4) of said rules, when thresh hold limit increased first time,
2. This is a continuing default under which the company, its directors and secretary shall be punishable to with fine which may extend to five hundred rupees for every day during which the default continue. In present case, no defense is available under the proviso the sub-section (1A) of Section 383A is available.
3. The Amendment rules of 2009 does not make the this continuing default good unless it is a case of fresh appointment.
4. The company again makes non – compliance when paid – up share capital again increases.
5. Due to error with MCA21 System, when Master data of the company available on the MCA21 portal shows paid –up capital of the company above the thresh – hold limit and ‘view signatory details’ shows such person as secretary of the company, any prudent man may consider such person a ‘whole – time secretary’ of the company and thus treat him as ‘company Secretary’.
6. Under the provision of Section 24 (a) of the Companies Secretaries Act, 1980 any person who not being a member of the Institute represent that he is a member of the Institute shall be punishable with fine and with imprisonment. The non – compliance by secretary in above case study, may safely be treated as his misrepresentation about himself as ‘company secretary’.
7. In present case study, MCA21 system represents that person as ‘company secretary’, Which is gross violation of clause (b) of sub – section (1) of Section 25 of the Company Secretaries Act. Under this clause no person shall award any degree, diploma, or certificate or bestow any designation which indicates the position or attainment of any qualification or competence in company Secretaryship similar to that of a member of the Institute.

In the present case study, whole MCA21 System along with company and its secretary misrepresent the fact and is a co – accused of non – compliance.

[UPDATE: Form 32 was since replaced by Form DIR – 12 under the Comapnies Act, 2013 and the Companies Rules.]

[My edited brief article  is published in 91st Edition of e Newsletter  (August 2011) of Mysore Chapter of Institutes of Company Secretaries of India. This newsletter is also available on official links: http://www.icsi.edu/mysore or http://www.esnips.com/web/icsimysore.]