Disqualification of Directors under Section 274(1)(g) of Companies Act, 1956-Clarification

General Circular No. 8/2002

No.2/5/2001-CL.V

Government of India

Ministry of Law, Justice & Company Affairs

Department of Company Affairs

5th floor, `A’ Wing,  Shastri Bhavan,

Dr. R.P. Road, New Delhi.

Dated: 22.3.2002

To

All Regional Directors

All Registrars of Companies

Subject: Disqualification of Directors under Section 274(1)(g) of the Companies Act, 1956 clarification

Sir,

As you are aware, the provisions of Section 274 of the Companies Act, 1956 were amended through Companies (Amendment) Act, 2000 (w.e.f. 13-12-2000) and a new clause (g) was inserted to sub-section (1) of this Section.  Through this clause a director of a public company, which has made defaults in filing of annual accounts and annual returns and in repaying deposits/interests thereon on due date or redeeming its debentures on due date or in paying dividend for period specified in that Section, is disqualified to be appointed as director of other public companies for a period of five years from the date on which such public company(ies) so defaulted.

2. A high proportion of the companies had been defaulting in filing the annual accounts and annual returns and a large number of companies were defaulting in repayment of deposits/interest thereon and in redemption of debentures which put investor to lots of hardships and the remedial action including a deterrent punishment to the errant directors was essential.  But ironically, the errant directors were not only continuing in the defaulting companies but becoming directors in other companies too.  It was in this context that in the Companies Act, 1956 the new sub-section 274(1)(g) was inserted and the RBI also took some remedial measures.

3. The intention and purpose of the above amendment was to disqualify the errant directors, protect the investors from mismanagement, ensure compliance in filing of annual accounts and annual returns which are the means of disclosure to all the stakeholders, increase the compliance rate of filing of the statutory documents and infuse good corporate governance in the regulation of corporate affairs in the country.

4. The Department, however, has received representations from Public Financial Institutions, Government owned financial companies and other Financial Institutions and Companies in respect of these provisions.  The Banking Division in the Finance Ministry has also supported the apprehension of the   Financial   Institutions.  The   representations have been considered carefully keeping in view on the one hand, the need for strict compliance with the provisions of the clause (g) of sub-section (1) of Section 274 of the Companies Act, 1956 and on the other hand the non-obstante clause in statutes of some of the Public Financial Institutions and the special situation of the nominee directors of Public Financial Institutions/Banks and the nominees of Central and State Government companies.

5. The Government has decided to (i) clarify the legal position in respect of the Public Financial Institutions/Banks having non-obstante clause in their statute (ii) to give some relief to the nominees of the Public Financial Institutions/Banks/Central and State Government; and (iii) to exempt Government Companies from the applicability of the provisions of Section 274(1)(g) of the Companies Act, 1956.

6. While considering the applicability of the provisions of Section 274(1)(g) of the Companies Act, 1956, the Government has taken into account the following points:

(i) In addition to protecting the interests of the Public Financial Institution/Bank which they represent, the Nominee Directors are also expected to serve the best interest of sound public policy and bring about higher levels of corporate governance.

(ii) In view of implicit disqualification in Section 274(1)(g), qualified and experienced professionals, both official and non officials, suitable for being appointed on the Boards of assisted concerns may not agree/available, thus adversely affecting the interests of the Financial Institutions.

(iii) Presence of the Nominee Directors on the Boards of assisted concerns and close monitoring through them of all the affairs of the assisted concerns is far more desirable when the company is in default to the Banks/Financial Institutions.

7. However, the Government hereby further clarifies that the Nominee Directors of Public Financial Institutions/Banks/Government should in order to avail the relief granted are expected to comply with the following:-

(i) The Nominee Directors are expected to work assiduously towards observance of good corporate governance practices in the company with due regard to the legitimate interests of the various stakeholders.  The various provisions relating to good corporate governance have been introduced in the Companies Act Rules/Regulations and clause 49 of the Listing Agreement introduced by the SEBI.  The Nominee Directors are expected to study these provisions of corporate governance and have them implemented.

(ii)  Ensure that the operations of the company are conducted in consonance with public policy.

(iii) Ensure strict compliance in letter and spirit of all the statutory provisions in particular the provisions of the Companies Act and the regulations, clarifications etc. issued there under.  It is the duty of the nominee directors to fully acquaint themselves in the relevant provisions of the Company Law and ensure that measures are instituted to monitor and certify that these statutory provisions are being observed.

(iv) The Nominee Directors should see that important committees of the Board of Directors are constituted and are functioning effectively such as Audit Committee, Nominations Committee, Remuneration Committee etc.  The Nominee Directors are expected to seek membership of these important committees and through their active participation in such committees ensure that the objectives of setting up these committees are being achieved.

(v) The Nominee Directors are expected to regularly attend and actively participate in the proceedings of the Boards and in committee on which they are included.  Their frequent absence for insufficient reasons from the meetings of the Board of Directors/Committees would negate the purpose for which the Nominee Directors have been nominated by the Institutions and they would not be able to perform the various responsibilities listed out in this paragraph.

(vi) Duly safeguard the interest of the Government/Banks/Financial Institutions which they represent.  Ensure proper utilization of financial assistance by the assisted company and prevent any misuse/diversion of funds by the promoters/management of the companies.

(vii) Provide adequate feedback to the nominating Institutions/Banks/Companies on the affairs and operations of the assisted concerns.

(viii) The Financial Institutions are expected to closely monitor the participation by the Nominee Directors in the Boards/Committees as above and to ensure that they are discharging their responsibilities as listed out above.  In case any Nominee Director is failing to discharge his/her responsibilities the Institutions are expected to take steps to replace him/her.  The Institutions are also expected to send a six monthly report to the Department of Company Affairs (ROC) bringing out the steps taken by them to ensure that their Nominee Directors are discharging their responsibilities.  The Financial Institutions should also in a separate section of their Annual Report clearly bring out the measures instituted by them to ensure that the system of Nominee Directors is functioning effectively.

8. Accordingly, it is clarified that:

(i) Nominee Directors appointed by the Public Financial Institutions and Companies established under the Acts of Parliament having non-obstante provisions over the Companies Act, 1956, like IDBI, LIC, UTI, IIBI etc., in their respective statutes shall not be liable to be disqualified for appointment as directors by virtue of Section 274(1)(g) of the Companies Act, 1956.

(ii) Nominee Directors appointed on the Boards of assisted concerns or other public companies by (a) public financial institutions within the meaning of Section 4A of the Companies Act, 1956; (b) Central or State Government: and (c) banking companies are also exempt from the provisions of Section 274(1)(g) of the Companies Act, 1956.

9. All Regional Directors/Registrars of Companies are, therefore, directed not to take action under Section 274(1)(g) of the Companies Act, 1956 in respect of the above directors.

Yours faithfully,

(Thakr Sharan)

Under Secretary to the Govt. of India

Tel. No. 3389622

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Category : Company Law (3412)
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