On 1st February 2016, Ministry of Corporate Affairs uploaded the report of Companies Law Committee on its website here. In 4th post on this report, we will discuss recommendations of the committee related to shares, debentures, general meeting, NFRA, Board Report, CSR etc.
Before reading further, I would like to disclose that I was part of two groups; “Task Force on Companies Law” and “Research Group on Companies Law” constituted by the Institute of Company Secretaries of India. All view here are personal and not of these groups or ICSI.
I might have missed few points either because of no opinion or no comfort. I request, please feel free to add value of their views in comment section. No editing will be there as long as language is professional and parliamentary.
Beneficial Ownership [Section 89]
The Committee recommended to amend the Act to mandate the following:
a) Provide a definition of beneficial interest in a share, and beneficial ownership in a company. The existing definition under SEBI Circular/Guidelines and the Prevention of Money Laundering Act may be used as a basis for the definition in the Companies Act, 2013. The rules issued under the United States Securities Exchange Act of 1934 define beneficial ownership in a security, which can be used as a basis for the definition of beneficial interest in a share.
b) Companies and individuals may be obligated to obtain information on beneficial ownership. In this regard, companies may be empowered to seek information from members and in case of failure to supply the required information, apply sanctions in the form of suspension of rights against the beneficial interests subject to adequate safeguards.
c) Companies would also be mandated to maintain registers of beneficial owners and provide the information to the registry (MCA21). Periodic updating may also be mandated. Data privacy concerns may be addressed by making only part of the filed information available to the public.
d) Companies not complying with the requirements may be liable to fine and criminal prosecution.
While making this very prompt recommendation, committee should have deliberated more and recommended proper draft for the purpose.
Personal Information [Section 94 read with Section 88]
The register of members contained various personal details of shareholders, like their PAN card details, E-Mail ID, address of members, which ought not to be used for commercial purposes. Accordingly, the Committee suggested that such personal information, as may be prescribed in the Rules, may not be made available publicly.
Committee rightly suggested that personal information should not be required to be made public. This provision is clear violation of right to privacy as fundamental right. Even if, right to privacy is not a fundamental right, such information should not be made available to all and sundry to prevent any misuse.
Holding of Annual General Meeting [Section 94(1)]
The Committee did not agree with the suggestions to allow AGMs to be convened abroad if 75% or more of members of the company reside abroad on the ground that the companies incorporated in India hold at least the annual general meeting in India to establish territorial nexus.
However, the suggestions to allow private limited companies and wholly owned subsidiaries of unlisted companies to convene the AGMs at any place in India provided approval of 100% shareholders is obtained in advance, is recommended by the Committee with a view to ease doing business. This would require amendment to Section 96(2) so that exemption can be provided to such class of companies.
I agree with this recommendation. I suggest electronic participation of members in private limited companies and wholly owned subsidiaries of unlisted companies.
Shorter Notice of General Meeting [Section 101(1)]
The Committee recommended for the requirement of ninety-five percent of the votes exercisable at such a meeting to be applicable in the case of extraordinary general meetings only. The Committee while considering the suggestion to allow acceptance of proxy till the beginning of the general meeting referred to the Standing Committee’s recommendations (2009) on proxies, and did not agree to the suggestions because of apprehensions about their possible misuse.
Committee rightly proposes no change in law for extra ordinary general meeting but not clear about annual general meeting. I support no change in this provision.
Filing of resolutions and agreements [Section 117]
The Committee recommended that while the filing requirement ought to continue, MCA may address the concerns of companies by adequately publicising the provisions in the MCA21 system to ensure confidentiality of such filed information.
I agree with opinion of the committee that such filings ensured that sensitive documents were not tampered with, and the original version of the documents filed with the Registrar could be used to ensure correctness of the documents. While acknowledging that sensitive information like business strategies, budgets, financing plans etc. if available publicly could hamper the business interest and that an amendment had already been made to ensure that these filings were not available for public inspection.
Every company, in my view, should maintain sufficient transparency towards stakeholders. List of restrictive item for public disclosure should be small.
National Financial Reporting Authority [Section 132]
The Committee deliberated in detail on the matter and felt that in view of the critical nature of responsibilities wherein lapses have been seen to cause serious repercussions, the need for an independent body to oversee the profession is a requirement of the day. Major economies of the world have already established such regulatory bodies. The Committee by a majority view recommended that NFRA should be established early. Consultation may, however, be carried out with ICAI with regard to the jurisdiction of NFRA and the ICAI representation on NFRA.
When the Companies Act, 2013 was before parliament, I wrote a post on this blog stating that NFRA is strong warning to all professional bodies. It is clear with this report, NFRA is here to stay. All professional bodies have become political playground and employment exchange not professional regulatory bodies. With NFRA, ICAI will be free to play the role it like most – politics, event management and employment lobbing. I positively hope, SSB (Secretarial Standard Board) will also be statutory body soon leaving ICSI for politics, event management and employment lobbing.
Signing of Board Report and Financial Statements [Section 134(1)]
It was noted by the Committee that in case a company did not have a managing director, the Chief Executive Officer, irrespective of whether he was a director or not, being a KMP, and responsible for the overall management of the company; should be mandated to sign the financial statements. The Committee also noted that since the appointment of a managing director was not mandatory for all companies, the words “if any”, may be inserted after the words “managing director”.
Both these recommendation regarding of financial statements are good.
Board Report [Section 134]
The Committee felt that while some of the disclosures in the Board’s Report under the Companies Act, 1956 was insufficient and had become redundant, there was a need to fine-tune the current requirements, without reducing the information content of the Report. Form MGT – 9 be omitted with details regarding shareholding, etc. to be specifically prescribed under section 134(3). Salient points of the CSR Policy, Remuneration Policy may be included in the Report and the detailed documents/policies provided on the website of the company, if any, and web address or link of these documents/policies provided. Changes in the policies should be specifically highlighted in the salient points. Disclosures with regard to loans or investments under section 186 and particulars of contracts with related parties under section 188, if provided in the financial statements, may be only referred, and salient points discussed, in the Board’s Report. Disclosure requirements under Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 may be pruned (refer para 13.2 of Part II the report). For small companies, separate format for the Board’s Report may be prescribed.
The Committee also noted that the Board’s Report and the Financial Statements and the Corporate Governance reporting requirements of SEBI, which together are also called the Annual Report of the company, have duplication in disclosures. It recommended that these need to be harmonized so that the Report is structured, repetition is avoided and made more readable.
The Committee deliberated on the suggestion of replacing the specific requirement for disclosure, pursuant to the provisions of Section 197(12), of the ratio of the remuneration of each director to the median employee’s remuneration, with a comparison of the director’s remuneration with the weighted average of all the employees, since big companies had a large numbers of workers. The Committee decided to retain this requirement, and not affect any changes. The matter has been also dealt with in Paragraph 13.2 of Part I of this report.
These recommendations are simple but significant suggesting avoidance of duplication and simplification of reporting.
CSR for Foreign Company [Section 135]
The Committee agreed with the principle that the CSR provisions should be applicable to foreign companies, as provided in the Rules. The Committee, therefore, recommended that Section 384 of the Act may specifically include this requirement.
Read my views on recent report on CSR Committee here.
This recommendation is significant to bring all companies at equal platform. However, I personally do not feel CSR under any law hard or soft.
Comply or Explain [Section 135]
The Committee felt that while a carry forward might be desirable, the requirement of mandatorily transferring the unspent amount at the end of five-years would go against the principle of ‘comply or explain’ and would not be appropriate. In view of this, the Committee recommended the continuance of the current provisions, where the actual expenditure was reported with no obligation to carry over.
This is very loose point of this law. It would be more appropriate to keep CSR from some Guideline or Standards by any self regulatory body than keeping it as soft law in form of hard law.
CSR for not for profits company [Section 135]
The Committee felt that it would not be appropriate to give differential treatment to section 8 companies in the matter of providing exemptions from compliance of CSR provisions, as there are certain areas where examples could be found of section 8 and other companies co-existing, for example, companies in microfinance business. Further, there should not be a difficulty in section 8 companies using the prescribed percentage of its surplus for CSR activities. Thus, it was decided not to recommend for exemption of Section 8 companies from the CSR provisions of the Act.
I support this recommendation.
Right of member to copies of audited financial statement [Section 101]
The Committee felt that it would be appropriate that clarity allowing financial statements to be circulated at a shorter period in accordance with the provision for shorter notice meeting under Section 101 be provided in Section 136.
This is a correct suggestion for clarification.
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