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Friday, Aug 27, 2004

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India Inc troubled by concept paper's `officer in default' provision

Richa Mishra

New Delhi , Aug. 26

THERE seems to be a growing feeling among the corporate sector that the provision on `officer who is in default' in the concept paper for revamped company law would create hurdles in their functioning. Industry insiders felt that the expansion of the scope of the provision is not healthy.

In the concept paper the scope of `officer who is in default' has been enlarged in line with what was proposed in the controversial Companies (Amendment) Bill, 2003 (which was later withdrawn).

Other than the managerial personnel, even those employees of the company whose remuneration is more than that of a managing director or any whole-time director and hold along with his spouse and dependent children not less than 2 per cent of equity share of the company have been included in the provision.

This, according to the Federation of Indian Chambers of Commerce and Industry (FICCI), needs to be debated. There are a large number of cases where totally unconnected persons get remuneration more than the managing director and may own 2 per cent shares of the company but still not be involved in management or committing any act of malfeasance, he said.

"Though the provision is aimed at increasing the accountability of the people who have the effective control of the company, the limit of 2 per cent shareholding is on the lower side and needs to be increased substantially," said the FICCI official.

Corporate experts pointed out that the provision could essentially mean that promoter's children who are employed with the company in some capacity, without Board position, would be liable for punishment or penalty by way of imprisonment or fine. Besides, the 2 per cent shares could be held by the individual alone or collectively with his spouse and dependent children, experts stated.

Another area of concern for India Inc is the stipulation that "any other director in respect of contravention of any of the provisions of this Act, which had been committed with his consent or connivance or is attributable to any neglect on his part."

According to a PHD Chamber of Commerce and Industry (PHDCCI) official, the words `attributable to any neglect on his part' will have far-reaching consequences.

Since it is practically impossible for the directors to be `in the know' of the minute details of the activities in a company, it will be very difficult to ascertain whether contravention of any of the provisions can be attributable to `neglect' on the part of the director, PHDCCI official said.

Unless there are positive indications about his consent, a director should not be held liable for contravention of the provisions.

Therefore, the words `or is attributable to any neglect on his part' should be dropped, the official said.

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