REPORT OF THE COMPANIES LAW COMMITTEE – 5

On 1^st February 2016, Ministry of Corporate Affairs uploaded the report of Companies Law Committee on its website here. In 5th post on this report, we will discuss recommendations of the committee related to Auditors, Directors, Independent Directors, 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.

Ratification of Auditor [Section 139(1)]

The Committee felt that it would be advisable to omit the provisions with respect to ratification, as it defeats the objective of giving five year term to the auditors. This would also remove the inconsistency in the Act.

This is correct position consistence with Parliamentary Committee report on which present Companies Act, 2013 is based.

Services by Auditor [Section 144]

The language of Section 141(3) (i) was such that a firm which was engaged in any of the activities mentioned in Section 144 anywhere in the world, and was rendering any such service to companies other than the auditee company, could not be appointed as an auditor of a company in India, even if such services were rendered to an entity which was totally unconnected with the auditee company.

The Committee noted that any relaxation to section 141(3)(i) read with Section 144 would compromise independence of auditors but clarity need to be provided.

This is good principle. This principle need to apply in case of Secretarial Auditor and Cost Auditor also.

Guidance Note on Management Services [Section 144(h)]

Clarity was sought on the term ‘management services’ used in Section 144(h). Committee recommends that ICAI, after consulting the Ministry of Corporate Affairs, should come up with a guidance note for auditors.

Residence requirement for Directors [Section 149(3)]

The Committee felt that it would be more appropriate that such a requirement is in relation to the director’s stay in India during the financial year and not the calendar year, with the requirement effective after a period of six months from incorporation.

The Committee recommended that it would be more appropriate that the residence requirement for director is for the current financial year. On the suggestion to align the requirements of residency with that of the Income Tax Act, 1961, the Committee felt that it may not be appropriate as its requirements are more expansive rather than restrictive and would defeat the purpose of prescribing the residency criteria.

A director should have resident status, if actually required, in current year as resident status in past year does not help company or enforcement. Moot question still is who will be resident director? Should executive director or any non – executive? What benefit would be, if company has resident director? What if he flies over night when you want him in India, as Anderson of Union Carbide did after Bhapal Gas Tragedy?

Materiality for Independent Director [Section 149]

The Committee recommended that the test of materiality for the purpose of determining whether pecuniary relationships could impact the independence of an individual to be an independent director may be introduced.

The Committee felt that the scope of the restriction on “pecuniary relationship or transaction” entered into by a relative be made more specific by clearly categorising the types of transactions as provided under Section 141(3)(d).

No NRC for Independent Director [Section 149]

The Committee recommends that in case of appointment of Independent Directors and Directors recommended by the Nomination and Remuneration Committee, the requirements of Section 160 ought to be dispensed with.

Alternate Director [Section 161(2)]

The Committee recommended that there should be a prohibition in the Act for appointing a director of a company as an alternate director in the same company.

Number of Directorship [Section 165]

The public consultation process that directorship in a subsidiary by a director of the holding company should not be counted while calculating the maximum number prescribed, the Committee felt that the prescription of maximum number of directorships should not be diluted as the subsidiary would also be as important as the holding company for the time and attention of the Director.

I welcome this suggestion. Same time, I would like to apply this logic for appoint of Company Secretaries and other Key Managerial Personnel in subsidiary companies, which are executive position, not non – executive positions as director is.

Disqualification for appointment [Section 167]

The Committee recommended that the vacancy of an office should be triggered only where a disqualification is incurred in a personal capacity and therefore, the scope of Section 167(1)(a) should be limited to only disqualifications under Section 164(1).

The Committee also recommended that a disqualification under Section 164(2) be only applicable to a person who was a director at the time of the non-compliance, and in case of a continuing non-compliance, there should be a period of six months’ time allowed for a new Director to make the company compliant.

This is correct recommendation.

Resignation of Director [Section 168]

The Committee felt that it would be appropriate if an option of intimating resignation to the Registrar was given to the Director instead of making it mandatory. The requirement of mandatory filing by the company in the prescribed Form should continue. This would also facilitate foreign Directors.

This is good recommendation.

Director Identification Number [Section 152]

The Committee considered and recommended that necessary flexibility may be provided in the Act to do away with the requirement of DIN or provide an option to shift to AADHAAR or any other universally accepted identification number at a future date.

This is half hearted recommendation and more targeted to impose Aadhaar everywhere. When Director Identification Number (DIN) as well as Digital Signature is based on Permanent Account Number (PAN), why not DIN with PAN. Unfortunately, government does not want simple solution but big budget opportunities.

Please note: This blog invite readers to share their comments, suggestions, hardship, queries and everything in comment section. This blog post is not a professional advice but just a knowledge sharing initiative for mutual discussion.