The Hindu Business Line : Case for secretarial independence

AS PER Section 383A (1) every company having such paid-up share capital as may be prescribed shall have a whole-time secretary. At present, the prescribed share capital threshold is Rs 2 crore. In other words, a company having paid-up share capital of not less than Rs 2 crore must have a whole-time secretary. And where the board of directors of any such company comprises only two directors, neither of them shall be the secretary of the company.

The proviso inserted to this section, vide the Companies (Amendment) Act, 2000, says if the share capital is less than the prescribed limit, it shall file with the Registrar a secretarial compliance report given by a secretary in whole-time practice if its paid-up share capital is Rs 10-lakh or more. Should there be a default in complying with this regime, the company and every officer of the company who is in default, shall be, in terms of Section 383(1A), punishable with fine which may extend to Rs 500 for every day during which the default continues.

What happens if a company has a whole-time company secretary in place despite not being mandated to do so by reason of its paid up capital being less than Rs 2 crore. This could happen for a variety of reasons. One, the company concerned may feel more secure with an in-house secretary around. Two, he might have been appointed when the prescribed threshold was lower, say, when it was Rs 50 lakh. As things stand, such a company will be obliged to file a secretarial compliance certificate despite having an in-house secretary. This would result in avoidable duplication of expenses for such companies which burden incidentally has not been imposed on bigger companies, whereas considering their size and public stakes, there was every case for it.

There are two extenuating circumstances provided in the proviso to Section 383(1A) for not complying with Section 383A(1). First, it shall be the defence to prove that all reasonable efforts to comply with the provisions of sub-section (1) were taken. What exactly are reasonable efforts? Is the defaulting company required to prove that it came out with advertisements in appropriate media? Is this defence available as much to non-appointment of a secretary in practice by smaller companies as it is available for non-appointment of an in-house secretary by bigger companies?

With smaller companies, this alibi should wash even less. How can it be possible that a company could not land a secretary in practice with or without reasonable efforts? After all, no company has ever suffered from dearth of auditors. And, therefore, it is a tad surprising that the government has visualised a scarcity scenario in the context of secretaries. True, a secretary like an accountant is not allowed to advertise or seek professional work. But like auditors, secretaries too can worm their way into the hearts of company managements through other means.

At any rate, if the same alibi were to be permitted under Section 224, a company can possibly escape auditor's scrutiny. That it has not been rightly permitted points to the need for not permitting the same in case of secretaries too. Be that as it may, the second extenuating circumstance, this one specifically for non-appointment of in-house secretary by bigger companies, is the difficult financial position of the company rendering it beyond its capacity to engage a whole-time secretary. This is just plain hilarious.

Why should a company be permitted to scrimp or cut corners only with reference to the appointment of a whole-time secretary? At any rate should not the big companies offering either of the two alibis be at least required to file with the Registrar secretarial compliance certificate? Surely, this one-time expenditure would not be such a strain on the finances of the company given the fact that a limited year-end activity is bound to be less expensive than what it would cost to employ an in-house secretary.

There is no reason why filing of secretarial compliance certificate should be mandated only for smaller companies. Bigger companies despite having an in-house secretary must also be mandated to do so. After all, in the context of audit, we have both internal and external auditors. The presence of internal auditor has never been trotted out as an alibi for not having an external auditor though admittedly the raison d'etre of the twin appointments is vastly different.

In any case, outsourcing of this function also imparts objectivity to the whole exercise. If auditor should be fiercely independent, so should a secretary.

It is strange that the independence of the secretary of a smaller company has been secured — by insisting upon an outsider — whereas the independence of the secretary of a bigger company has been compromised — by being content with an insider.