Abhishek Seth, M.Sc. (Economics), ACS
India has laws for everything. Without laws Indians follow nothing. The Children’s School Bags Act, 2006 prescribes school bags should not weigh more than 10% of the body weight of the child. Similarly, it may be proposed, that laws should not create more problems than they aim to solve.
The Indian corporate sector is subject to multiplicity of laws, rules, regulations, notifications, circulars, judgements, precedents and what not. While some may grumble over India’s ranking on the ease of doing business, some may possibly wonder why it’s in the list at all!!!
The Secretarial Standards (“the Standards”) aims to plug the gaps that render company form of organizations vulnerable to misuse as conduit of illegal activities. Only time will show, whether a clean corporate avatar, or more sophisticated evasion mechanisms would emerge. After all, formalization of compliance is nothing new.
The standard is outcome of dedicated effort of many stalwarts in various professions. What the Standards is expected to accomplish is making non-compliance more pinching – both for the corporate as well as the practicing professionals. But then, law is as good as its enforcement. Effectually, tighter norms may increase the scope for bribery rather than the degree of compliance.
The Corporate Affairs Ministry has the long habit of making everything applicable for everyone and then open the trickling tap of exemptions. The standards apply to listed public companies, unlisted public companies, private companies and small companies. Exemption has been granted to (probably non-existent) one person companies.
The primary responsibility of compliance with the SS lies with the Company Secretaries. Section 118(11) provides for a “penalty” of Rs. 25000/- on the company and Rs. 5000/- on every officer. While on first look the penalty may seem negligible, the Standards can create greater trouble than apparent.
The bottom-line is that the Standards have been given the force of any other legislation and compliance is mandatory. Though the standards are clarificatory in nature meant to compliment the Companies Act and Rules made thereunder, some clauses in the standard deserve their due attention.
The Board of Directors are the operating agents of a company acting in fiduciary relationship. Under applicable legislations, certain corporate decisions can be taken by the Board, whereas approval of the members / creditors/ others may be required for others matters. Para 1.2.8 of the Secretarial Standards – 2 on General Meetings states: “No business shall be transacted at a meeting if Notice in accordance with this Standard is not given.” This statement can wreck havoc in corporate decision making especially for small sized closely held private companies.
Companies are subject to a plethora of compliance check points when calling a general meeting. On top of that, if SS – 2 is violated, validity of the proceedings at the meeting comes under question. While for listed (larger) organizations have the need as well as the internal systems and personnel for compliance, smaller companies seldom have the resources to afford such compliance requirements.
While the Standards duly take pride in clarifying the gaps in the Act, many simple gaps remain unexplained. One such example is that proof of sending as well as delivery of Notices, Notes, Agenda, Draft minutes and necessary papers has to be maintained by the Company. Common mode of sending is through email and post. Whereas in case of post, it is possible to maintain proof of sending, proof of delivery but ironically, no proof can be maintained of “what” has actually been sent. In case of emails, proof of sending, content thereof can be maintained but proof of delivery is difficult to maintain. This may require companies to resort to email clients to prove delivery. Some clarifications in these issues could have been addressed.
If the language of the law is to be taken then violation of SS – 2 (notice related provisions) mean the company (Directors) are acting ultra-vires. Ultra-vires activities can have unfathomable consequences!
Another area of concern or confusion is the provision on time stamp. Both the standards require time stamping of records maintained electronically. As per the standards, “Timestamp” means the current time of an event that is recorded by a Secured Computer System and is used to describe the time that is printed to a file or other location to help keep track of when data is added, removed, sent or received.
While the definition is quite simplistic, implementation may be correspondingly cumbersome. While one may simply add the date and time in the header / footer portion of a document file, how do you ensure that the time being stamped is actually the correct one? Computer date and time can be changed quite easily. How do you counter an allegation of manipulation of the time stamp remains unclear. Customised software from the ministry could show the way.
The Companies Act, 2013 introduced the concept of Independent Directors’ and their separate meetings vide section 149 and Schedule IV. There was an emotional tug-of-war amongst the Company Secretary and Independent Directors regarding presence of the CS at the ID meeting, since CS is considered part of the management. Now, that the Standards has cleared the smoke by declaring that CS can be present if the IDs so desire. After all, it is the job of the CS to convene and facilitate meetings.