On 1st February 2016, Ministry of Corporate Affairs uploaded the report of Companies Law Committee on its website here. In 6th post on this report, we will discuss recommendations of the committee related to Related Party transaction, Audit Committee, Managerial Remuneration, Key Managerial Personnel, 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.
Video conferencing [Section 173(2):
The Committee, therefore, recommended that flexibility be provided to allow participation of Directors through video conferencing, subject to such participation not being counted for the purpose of quorum. However, such Directors, though not counted for the purposes of quorum, may be entitled to sitting fees.
This simply suggests sitting fee for directors participating through video conferencing.
Relate party Transaction in Audit Committee [Section 188 177]
The Committee recommended that the existing requirement for the Audit Committee to pre approve all related party transactions, subject to approval by Board or shareholders as required under Section 188 should continue. For transactions not covered under Section 188, the Audit Committee may give its recommendation to the Board in case it is not approving a particular transaction.
This recommendation seems logical.
In addition, the Committee recommended that, as provided in the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 related party transactions between a holding company and its wholly owned subsidiaries need not require the approval of the Audit Committee for transactions not requiring Board approval under section 188, and Section 177 be amended accordingly.
This recommendation does not have a correct logic. LODR is subordinate legislation and its wisdom could not be a guide for legislative wisdom. Committee should have deliberated independently, fee from SEBI – RBI Subordination Syndrome.
Nomination and Remuneration Committee [Section 178]
The Committee recommends that the NRC should instead ‘prescribe a methodology to carry out evaluation of performance of individual Directors, Committee(s) of the Board and the Board as a whole’, and the Board should carry out the performance evaluation as per the methodology either by itself, by the NRC or by an external party as laid down in the methodology. The performance review by the Independent Directors, as presently required in Schedule IV, may also form part of the methodology. Schedule IV may be amended accordingly. The provision may be reviewed after three years.
This recommendation need more study on human behavior aspect.
Loan to Directors [Section 185]
The Committee recommended, that it may be considered to allow companies to advance a loan to any other person in whom director is interested subject to prior approval of the company by a special resolution. Further, loans extended to persons, including subsidiaries, falling within the restrictive purview of Section 185 should be used by the subsidiary for its principal business activity only, and not for further investment or grant of loan.
Loan and Investment by Company [Section 186]
The Committee felt that sufficient safeguards have been built into the oversight mechanism of SEBI and Stock Exchanges, and the recommendations on Beneficial Ownership register requirements should dispel the regulatory concerns. Keeping this in mind, the Committee recommended that the restrictions on layering as contained in the section be omitted. Further, ‘principal business’ of an investment company may be clarified in the Explanation below sub-section (13) of Section 186 on the lines of RBI’s stipulations.
I recommend, such exemption only if a subsidiary and all its holding companies have such Register of Beneficial Ownership and its copy available for public inspection.
The Committee recommended for the insertion of an ‘explanation’ to clarify the exclusion of employees from the requirement of the sub-section/clause.
The Committee felt that the company should be looking at the effective yield against the loan given by it and such yield, irrespective of whether a loan is given to a company incorporated outside India, should not be less than the prescribed rate under Section 186(7).
I do not understand why government should go extra mile to protect investors, when they can speak in AGM and Electronic Voting. Interest rate should be decided by company in general meeting, not by government.
Related Party Transaction [Section 188]
As all parties in case of joint ventures and closely held public companies may be related parties, not allowing them to vote may be impractical and such cases may be specifically excluded from the requirements of the second proviso.
When all parties are related parties, this rule should not apply. Further, where in Joint venture agreement is incorporated in Articles, faith of such related party transactions may be decided and incorporated in Articles itself and give them voting right.
Prohibition on forward dealing and Insider trading of securities [Section 194 & 195]
The Committee deliberated on the issues involved and noted that SEBI regulations are comprehensive in the matter (and also apply to companies intending to get listed), and in view of the practical difficulties expressed by stakeholders, sections 194 and 195 may be omitted from the Act.
Strangely, committee took wrong argument. Securities of private companies and unlisted public companies are legally and economically are marketable securities, though no formal market is present. Committee instead of suggesting such forward law should have taken step for development of informal market for unlisted securities.
Disclosure of remuneration of directors [Section 197]
The Committee, therefore, recommended that the Schedule may be amended to substitute the requirement to pass a special resolution by shareholders with an ordinary resolution, in cases where the managerial person was not a promoter, and a professional with domain knowledge / relevant experience; and was not related to any director or promoter of the company and did not hold more than two per cent of the paid-up equity share capital of the company or its holding company. In other cases, however, the requirement for special resolution of the shareholders should be retained.
The Committee further recommended that the limits of yearly remuneration prescribed in the Schedule be enhanced. Further, the Committee also recommended that the requirement for government approval may be omitted altogether, and necessary safeguards in the form of additional disclosures, audit, higher penalties, etc. may be prescribed instead.
I agree with both recommendations. I, even suggest, no limit of yearly remuneration subject to additional yearly shareholders approval by 95% of voting power with wiping out of capital schedule mentioning period in which half of the capital be wipe out had no profit earned by the company during the period. There should always be an upper limit for promoter director within the Act or Schedule with all check on possibility of wiping out of fund.
Key Managerial Personnel [Section 203]
The Committee opined that while the current provisions limit the officers who can be designated as key managerial personnel, flexibility would be desirable for companies to designate other whole time officers of the company as key managerial personnel. The Committee further recommended that the Board can be empowered to designate other whole time officers of the company as key managerial personnel and that the definition of key managerial personnel in Section 2(51) may also be accordingly modified.
This is a good suggestion. Where company is of the opinion that an officer of company has significant powers and responsibilities, and be designated as key managerial personnel; company should have such freedom. All legal responsibilities and compliance required related to Key Managerial Personnel should be complied with.
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.
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