Jyoti Srivastva

 Jyoti SrivastvaOf late, the Information Technology made it practicable to have all kinds of meetings through Video Conferencing. Meetings through Video conferencing has telescoped the world and has made it look smaller than ever before. Now throughout the world, every Tom, Dick, and Harry is approachable just at a click of the mouse. Keeping in pace with the new technology, the Ministry of Corporate Affairs (MCA) enacted Section 173 of the Companies Act, 2013 (‘the Act’) which enables the directors to participate in a meeting of the Board through video conferencing or other audio visual means.

Provisions w.r.t. meetings through Video conferencing or other Audio visual means

Companies Act, 2013

Section 173 of the Act read with Rule 4 of the Companies (Meetings of Board and its powers) Rules, 2014 provides that the directors can participate in a meeting of the Board through video conferencing or other audio visual means. Further, rules provides the following matters (‘restricted items’) which should not be dealt with in a meeting through video conferencing or other audio visual means:

  • the approval of the annual financial statements;
  • the approval of the Board’s report;
  • the approval of the prospectus;
  • the Audit Committee Meetings for[1][consideration of financial statement including consolidated financial statement, if any, to be approved by the Board under sub-section (1) of Section 134 of the Act;] and
  • the approval of the matter relating to amalgamation, merger, demerger, acquisition and takeover.

Secretarial Standard- 1 (SS-1)[2]

As much as SS were introduced with the noble intent to ensure uniformity of secretarial practices across companies, the SS have also sought to introduce such provisions which are apparently in conflict with the provisions of the Act. More so certain provisions defy the very intent behind certain provisions of Act. A case in point is para no. 1.2.3 of SS-1.

Explanation under Para 1.2.3 of SS-1 facilitates directors to participate through Electronic Mode in the discussion of the restricted items, with the expressive permission of the chairman.

FAQs of ICSI[3]

ICSI has released the parawise FAQs on Secretarial Standards (FAQs) on 23 July, 2015. In response to para 1.2.3 of SS-1 it has been clarified that this provision is not in conflict with Act. It states that the chairman shall be given the discretion to allow such participation only over and above the physically present Quorum in case he needs to take views of any such Director on restrictive items to encourage informed decision making. Any such Director participating through Electronic Mode in respect of restricted items with the express permission of Chairman should neither be counted for the purpose of Quorum nor be entitled to vote in respect of such restricted items.

What will prevail?

Generally, in addition to the Secretarial Standards, the requirements laid down under any other applicable laws and rules and regulations, need to be complied with. In case of variations in any provision of the applicable laws and the SS, the stricter provisions need to be complied with. However, if, due to subsequent changes in the Act, a particular Standard or any part thereof becomes inconsistent with the Act, the provisions of the Act shall prevail.

Purpose of discussion

What makes the FAQs noteworthy for the purpose of discussion is the fact that explanation under para 1.2.3 of SS-1 read with FAQs is in conflict with the provisions of the Act.

As much as the basic intent of FAQs is to resolve the conflict between the provisions of the Act and SS, but it anyways miss the mark.

Explanation to Para 1.2.3 of SS-1 allows directors to participate through Electronic Mode in the discussion on certain restricted items, with the permission of the chairman whereas the Act read with relevant rule utterly restricts such participation on the restricted items.

Now the question is that, is there a legal basis for such a clarification? The answer would appear to be a resounding “No”.

Analysis

Before we set out to analyze the conflict, it would be appropriate for us to understand the intent of the Act behind such constraint on discussion of the restricted items through video conferencing. Since price sensitive information are likely to have a significant effect on the price of the shares if it were generally available, the intent of the Act was to keep the price sensitive information from being left out in the open and to prevent unauthorized users or hackers from gaining access to the system. The very intent was never to encourage informed decision making with respect to these restricted items.

Having said this, we can now relate the FAQs to the provisions contained in Rule 4 of the Companies (Meetings of Board and its powers) Rules, 2014. It would follow that in view of Rule 4, it would not be possible for the Board to transact the business of restricted items at a Meeting through video conferencing. However, the FAQs in this regard states that if the subject item is placed for consideration by the Board through video conferencing with the express permission of Chairman, it would mean that Directors in attendance at the Meeting through video conferencing would not be eligible for participating in the restricted item and consequently cannot vote on such item. Again, they would be considered as absent and shall not be counted for quorum for the limited purpose of transacting this item of business.

It is pertinent to note that even after the release of FAQs, the conflict between the Act and SS has not been resolved. Still, Rule 4 of the Companies (Meetings of Board and its powers) Rules, 2014 remains untouched and the conflict anyway exists. FAQ in this regard fails to bridge the gap between the provision of Section 173 of the Act read with relevant rule and explanation to para 1.2.3 of SS-1.

Conclusion

Given the pretext above, it can be concluded that the FAQs to explanation under para 1.2.3 of SS-1 has given rise to some inconsistencies and peculiarities. These are totally on a different note in comparison to the Act. It looks as if the intend of Act i.e. in this case being the sensitivity of the matter has been missed out while drafting the FAQs. It merely states that the directors participating through video conferencing on restricted item shall not be allowed to vote on that item and shall also not be counted for the purpose of quorum w.r.t that item. The question of quorum and vote doesn’t arise here at all. All that arises here is the sensitivity of the matter which in any case has been overlooked. Hence reasonable care should be taken before framing them so that the intent is served both in letter and spirit without giving rise to a wide range of doubts and chaos. We believe that the SS will be made realistic so as to not let any inconvenience creep in.

[1] Substituted for “consideration of accounts” by the Companies (Meetings of Board and its Powers) Second Amendment Rules, 2014 w.e.f. 14-08-2014.

[2]  https://taxguru.in/chartered-accountant/secretarial-standards-meetings-board-directors-ss1.html

[3] https://www.icsi.edu/docs/Website/FAQs%20on%20SS-2.pdf

(Author is Associate Company Secretary at Vinod Kothari & Co. and can be reached at  corplaw@vinodkothari.com)

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0 responses to “Does SS 1 provides "Gully"? – Participation in restricted items vide VC/AV mode”

  1. Balwant Jain says:

    Excellent Analysis.
    Congratulations. Why should the member not air their concerns in public.
    And who hears you in the councils or institute’s meetings?
    Keep it up.

  2. CA. Bhavesh Savla says:

    Agree with you. very pertinent point. Even in some other respects, I think the Secretarial standards have gone beyond the Act.

    CA. Bhavesh Savla

  3. Mahesh says:

    With due respect to the author, above post questions the credibility of ICSI. We being members of ICSI, we should avoid posting such things publicly. In case any of the member differs with the views of ICSI, it can be discussed with the Institute privately.

  4. rkgupta says:

    Agreed with the point raised by the author. The ICSI should look into it to clarify the matter.

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