The Hindu Business Line : The importance of appointing a secretary

The regulators, the Securities and Exchange Board of India (SEBI) and the Ministry of Corporate Affairs (MCA) do have regulations for the compulsory appointment of managerial personnel in companies. SEBI has directed stock exchanges to include clause 49 in the listing agreement of listed companies. One of the very important conditions of good corporate governance is the mandatory provision of appointment of independent directors.

The MCA, before the introduction of such provision by SEBI in the Companies Act, 1956, introduced the concept of mandatory appointment of managing director/whole-time director/manager and secretary in whole-time employment.

Mandatory appointment

SEBI, in its own wisdom thought it fit, in the overall interest of investor protection, that the composition of board of directors of a listed company shall contain certain number of independent directors who, apart from receiving director’s remuneration, do not have any other material pecuniary relationship or transactions with the company, its promoters, its management or its subsidiaries, which in the judgment of the board of the company concerned may affect the independence of judgment of the director. It has accordingly, prescribed that:

In case a company has a non-executive chairman, at least one-third of the board should comprise independent directors;

In case a company has an executive chairman, at least one-half of the board should comprise independent directors.

The MCA, on its part, on the recommendations of the Sachar Committee “that large size companies with diversified nature and complexity of operations cannot be successfully managed without somebody being specially charged with substantial powers of management”, made it compulsory in the year 1988 that public companies and private companies which are subsidiaries of public companies, having a paid-up capital of such sum as may be prescribed, must appoint a managing or whole-time director or manager.

The compulsory appointment of a secretary was inserted by the Companies (Amendment) Act, 1974 (w.e.f. February 1, 1975) “considering various laws which the management of a company are required to comply with…”

The criteria

Independent directors: The appointment of independent directors in a company is dependant on the fact whether it has an executive or a non-executive chairman and relates to the strength of the composition of the board; and

It is for all listed companies which have a paid-up capital of not less than Rs 3 crore for which corporate governance is applicable.

Managing/whole-time director or manager: The appointment of such managerial personnel is dependant upon the size and paid-up capital of the company;

It applies for all public companies and private companies which are subsidiaries of public companies, and having a prescribed paid-up capital which is at present Rs 5 crore.

Secretaries: The appointment of secretary is for every type of company and solely on the paid-up capital of the company which, at present, is Rs 2 crore.

Managerial personnel appointment

Independent directors: The board has to identify a person who could fit in as an independent director, with the requisite knowledge of the company;

Such a person shall also be complying with the important condition of “independent director” under clause 49 of the listing agreement.

Managing/whole-time director or manager: The directors have to elect one among themselves to act as managing/whole-time director;

If the appointment is of a manager, such person need not be a member of the board.

If the appointment of a managing/whole-time director is of a professional candidate, identifying such a person may take some time and for the compliance of the provisions of the Act, one among themselves can act till such time.

Secretaries: Only a member of the Institute of Company Secretaries of India (ICSI) can be appointed as a secretary of a company, in compliance with the provisions of the Act;

There is no exemption provided and a private limited company or a joint-venture company or even a sick company having prescribed paid-up capital has to employ a secretary on a whole-time basis.

English Companies Act

The Indian Companies Act is broadly on the lines of English Companies Act. Initially, at the time of introduction of the provisions relating to mandatory appointment of secretaries, it was stated in the “Object of Section” as follows: The UK Companies Act contains a provision for the appointment of a secretary for every company. However, such a compulsory provision in the case of small-sized companies may involve a disproportionately heavy burden on them. It is, therefore, proposed that every company having a paid-up capital of Rs 25 lakh (now Rs 2 crore) or more shall have a secretary.

The said English Act (Companies Act, 2006) now reads as under:

Section 270: Private company not required to have secretary.

Section 271: Public company required to have secretary.

Breathing time for directors

The recent amendment in clause 49 of the listing agreement, providing a time limit of 180 days for filling of the vacancy of an independent director, is basically breathing time given to the board. The board will have ample time to identify a person who has the requisite qualifications and experience which would be of use to the company and which, in the opinion of the company, would enable him to contribute effectively to the company in his capacity as an independent director.

The Act does not provide such a rider to the directors in the case of appointment of a managing/whole-time director or manager and a secretary when a vacancy occurs. In case a company plans to increase its paid-up capital beyond the required level of such an appointment, it can very well defer it for some time, whereas the Companies (Appointment and Qualifications of Secretary) Rules 1988 (the Rules) provide at least 12 months for appointment of a secretary in case of increase in paid-up capital. It is, therefore, important and necessary to consider and provide for a grace period for appointment of a managerial person or a secretary in the event of a vacancy arising in respect thereof in the Act for efficient and smooth functioning of a company without any threat of prosecution of officers in default.

There is one another provision in the Act for smaller companies to comply with the law. A company not required to employ a whole-time secretary and having a paid-up share capital of Rs 10 lakh or more shall file with the Registrar of Companies (RoC) a certificate from a secretary in whole-time practice in such form and within such time and subject to such conditions as may be prescribed. Such a certificate shall confirm the compliance of all the provisions of the Act and a copy of such certificate shall be attached with the board’s report, which is sent to shareholders.

Suggestions

There should not be any compromise in the appointment of a secretary in a widely-held listed company and this is important not only for compliance management but also to protect the interests of investors. When a vacancy arises for appointment of a secretary, the company should be given a time limit to fill the vacancy at least as available in the Rules. The MCA is fine tuning the Companies Bill and it is appropriate to consider this for suitable amendment, in the overall interest of corporate entities, investors at large, professionals and, of course, for the regulator itself.

(The author is a Delhi-based Company Secretary.)

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Pranab Mukherjee’s Islamabad visit — Symbolism amid turmoil

The importance of appointing a secretary

MSP’s just a safety net

In investment banking, you either score a century or a duck

Achieving perfect hedge effectiveness tough

Transparency can be our greatest ally

Fund and famine

Slimmer packages, same price

Unfinished agenda