The Hindu Business Line : Can a director be guided to the secretary's chair?

THE board of directors of ABC (P) Ltd, having a paid-up share capital of Rs 3 crore, consists of two directors, one of them, Mr S, possesses membership of the Institute of Company Secretaries of India. The company desires to appoint him as a company secretary as well. State the legal position as per the Companies Act.

Restrictive provisions of Sections 314 are not applicable to the appointment of a director to an office or place of profit if he, in the opinion of the Central Government, possesses professional qualifications.

As per the clarification issued by the Department of Company Affairs, a member of a recognised professional body shall be deemed to possess professional qualifications.

Thus, in the instant case, there should be no problem in appointing Mr S as the secretary of ABC (P) Ltd. However, under Section 383A, in the case of a company having only two directors, none of them can be appointed company secretary in spite of having the requisite qualification.

In view of this, Mr S cannot be appointed as a company secretary unless the company first raises the strength of its board to a minimum of three directors.

Who is an insider?

WHAT are the penalties leviable under the SEBI Act, 1992 for indulging in insider trading? State the factors that are to be taken into account for determining the penalty.

The SEBI regulations define `insider' as a person who is or was connected with a company and who is reasonably expected to have access to unpublished price sensitive information in respect of securities of a company or who has received or has had access to such unpublished price sensitive information.

`Price sensitive information' means any information which relates directly or indirectly to a company and which if published is likely to materially affect the price of securities of company.

The following shall be deemed to be price sensitive information: i) periodical financial results of the company; ii) intended declaration of dividends (both interim and final); iii) issue of securities or buy-back of securities; iv) any major expansion plans or execution of new projects;

v) amalgamation, mergers or takeovers; vi) disposal of the whole or substantial part of the undertaking; and vii) significant changes in policies, plans or operations of the company.

The expression `unpublished' shall mean information which is not published by the company or its agents and is not specific in nature.

Speculative reports in print or electronic media shall not be considered as published information.

All directors of the company, senior officers of the company, including an auditor of the company legal and professional advisers of the company, company under the same group, official, or member of stock exchange, merchant banker to issue of the company, employees of public financial company or SEBI, or bankers of the company are also covered under the definition of `insiders', if they have reasonable access to unpublished price sensitive information about the company.

Penalty for insider trading (Section 15G): If any insider who:

i) either on his own behalf or on behalf of any other person, deals in securities of a body corporate on any stock exchange on the basis of any unpublished price sensitive information; or

ii) communicates any unpublished price sensitive information to any person, with or without his request for such information except as required in the ordinary course of business or under any law; or

iii) counsels, or procures for, any other person to deal in any securities of anybody corporate on the basis of unpublished price-sensitive information,

shall be liable to a penalty of Rs 25 crore or three times the amount of profits made out of insider trading, whichever is higher — SEBI (Amendment) Act, 2002 (w.e.f. October 29, 2002).

Factors to be taken into account while determining the penalty are contained in Section 15J. The Section provides that while adjudging the quantum of penalty under Section 15-I, the adjudicating officer shall have due regard to the following factors:

a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default;

b) the amount of loss caused to an investor or group of investors as a result of the default; and

c) the repetitive nature of the default.

Board meetings

THE board of directors of Infotech Consultants Ltd, registered in Kolkata, proposes to hold the next board meeting in May 2000. They seek your advice in respect of the following:

a) Can the board meeting be held in Chennai, when all the directors of the company reside at Kolkata?

b) Whether the board meeting can be called on a public holiday and that, too, after business hours as the majority of the directors of the company have gone to Chennai on vacation.

c) Is it necessary that the notice of the board meeting should specify the nature of business to be transacted?

Advice with reference to the relevant provisions of the Companies Act.

a) Section 301(5) provides, inter alia, that the register of contracts shall be kept at the registered office of the company. The said register has to be made available at the board meeting also. Accordingly, if a board meeting is held at a place other than the registered office, it will involve removal of the register of contract outside the registered office and, thus, result in violation of Section 301(5). The Department of Company Affairs (DCA) has, however, clarified that it would be sufficient compliance with the provisions of Section 301(5) if the company gives adequate notice to its shareholders, either once for all or from time to time indicating the prescribed periods during business hours and the days on which they may inspect the register kept under Section 301(2) at the registered office.

In view of the aforesaid clarification, it is clear that it is legally possibly to hold board meeting at any place if the requisite notice to shareholders has been given. Thus, in the given problem, the board meeting may be held in Chennai.

b) Under Section 288(1) adjourned board meeting cannot be held on a public holiday. The Company Law Board (CLB) has, therefore, said that Section 288 does not prohibit a company from holding its original board meetings on a public holiday, except where the articles of association provide otherwise.

Accordingly, board meeting may be held on a public holiday. Again, the Act is silent about the time of holding the board meeting. Therefore, there should be no objection to the meeting being held outside the business hours.

c) The Companies Act does not require an agenda for the meeting of the directors to accompany the notice thereof. Section 286 only requires that notice of every meeting of the board of a company shall be given to every director. Thus, any business can be transacted at a board meeting.

However, in some matters, prior notice is a practical necessity. These include appointment as managing director of a person who is already managing director/manager of another company (Section 316); inter-company loans and investments (Section 372 A); appointment of a person as manager who is already managing director/manager of another company (Section 386).

Inquiry into combinations

STATE the provisions of the Competition Act with respect to inquiry into combinations by the Competition Commission of India. What factors the Commission will take into account whole determining the adverse effect of a combination in a particular market?

The Commission may, upon its own knowledge or information relating to acquisition referred to in Section 5 (a) or acquiring of control or merger or amalgamation referred to in Section 5 (b) or merger or amalgamation referred to in Section 5(c), inquire into whether such a combination has caused or is likely to cause an appreciable adverse effect on competition in India.

The Commission shall not initiate any inquiry under this sub-section after the expiry of one year from the date on which such combination has taken effect [Section 20(1)].

The Commission shall, on receipt of a notice or upon receipt of a reference under Section 6 (2), inquire whether a combination referred to in that notice or reference has caused or is likely to cause an appreciable adverse effect on competition in India [Section 20 (2)].

For determining whether a combination would have the effect of or is likely to have an appreciable adverse effect on competition in the relevant market, the Commission shall have due regard to all or any of the following factors:

actual and potential level of competition through imports in the market;

extent of barriers to market entry;

level of combination in the market;

degree of countervailing power in the market;

likelihood that the combination would result in the parties to the combination being able to significantly and sustainably increase prices or profit margins;

extent of effective competition likely to sustain in a market;

extent to which substitutes are available or are likely to be available in the market;

market-share in the relevant market of the persons or enterprise in a combination, individually and as a combination;

likelihood that the combination would result in the removal of a vigorous and effective competitor or competitors in the market;

nature and extent of vertical integration in the market;

possibility of a failing business;

nature and extent of innovation;

relative advantage by way of contribution to the economic development, by way of combination having or likely to have appreciable adverse effect on competition; and

whether the benefits of the combination outweigh the adverse impact of the combination, if any [Section 20 (4)].

Ejusdem generis

THE rule of ejusdem generis has no applicability where general words precede specific words. Comment.

The ejusdem generis rule is relevant where an Act enumerates certain general words after using specific words, the general words shall be construed with reference to the specifics.

For instance, in the expression `in consequence of war, disturbance or any other cause', the words `any other cause' would take colour from the earlier words `war', disturbance' and, therefore, would be limited to causes of the same kind as the two named instances.

Similarly, where an Act permits keeping of dogs, cats, cows, buffaloes and other animals, the expression `other animals' would not include wild animals such as lions and tigers, but would mean only domesticated animals such as horses, and so on.

Again, the use of the words `Just and Equitable' in Section 433(f) of the Companies Act shall suggest that the grounds covered under this clause should be of a similar nature or magnitude as stated under clauses (a) to (e) of Section 433.

However, the rule has no application where general words precede specific words. Thus, in the definition of restrictive trade practice under Section 2(o) of the MRTP Act, the general description of restrictive trade practice precedes the specific enumeration.

Here, the general expression cannot be restrictive to the restrictive practices of the kind and nature specifically enumerated.

Again, Section 36A of the MRTP Act defines unfair trade practice in a similar manner. Thus, any deceptive method or trade practice used for promoting sale or use of any goods shall be an unfair trade practice and not merely the trade practices which are so mentioned in the said section.

Director dead

IN PARWEEN Woodcraft Co. Ltd, Mr James was named in the list of first directors. He, however, died before he could assume office. How can the problem regarding the appointment of a director be solved in this case?

In case of appointment of directors of a company, all the directors were appointed by one resolution and no shareholder objected to it. Discuss the position under the the Companies Act.

i) The vacancy in question is not a casual one as per Section 262 and cannot, therefore, be filled by the board. Accordingly, it will be necessary for the subscribers to the memorandum (who will then be only members) to convene a meeting for the appointment of the director.

To the extent to which the Articles do not make any other provision in this behalf, subscribers who would be entitled to requisition a meeting may call the meeting. A meeting is not necessary if all the subscribers concur in the appointment.

ii) Section 263 stipulates that in the case of a public company or a private company which is a subsidiary of a public company a motion shall not be made for the appointment of two or more persons as director of the company by a single resolution unless a resolution that it shall be so made has been first agreed to at the meeting without any vote being given against it [Section 263(1)].

A resolution which is in contravention of Section 263(1) shall be void, whether or not objection was taken at the time of its being so moved [Section 263(2)].

Hence, the appointment of directors will be void. But this does not exclude operation of Section 290 which validates acts where defects are afterwards discovered.

(To be continued)

(Suggested answers to a model paper on corporate laws for CA (Final))

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