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New Secretarial Standards: Useful Or Painful?

Published on Sat, Jul 04,2015 | 10:43, Updated at Tue, Jul 07 at 17:01Source : CNBC-TV18 |   Watch Video :

Starting this week, India Inc has to comply with 2 new secretarial standards – on board meetings and general meetings. Are they useful or painful? The President of the Institute of Company Secretaries of India – Atul Mehta is the special guest on this episode of The Firm.
 
Doshi: First if you can explain to us what these two new standards attempt to achieve and really what are some of the new practices that they introduce?

Atul Mehta
President, Institute Of Company Secretaries of India
 
Mehta: What used to happen, so far different  companies to follow the different practice with respect to the secretary issuing the note, issuing the agendas writing the minutes, books and all. So, there was an attempt which has been made by the Institute of Company Secretaries of India (ICSI) and of course this has been approved by the Ministry of Corporate Affairs.
 
Doshi: ...And provided for under the Companies’ Act.
 
Mehta: Under the Companies’ Act also and it was the need of the day. See, in India we have almost one million companies. 10 lakh companies, out of which we have 7,000 plus companies which is listed in our stock exchange and probably this number is one of the highest numbers in the world.
 
So, somewhere of course, we have this new Companies’ Act, 2013 which has taken care of so many corporate governance issue and probably this is one of the best legislations we have so far. Of course, there are some teething problems, but this is a huge legislation; we have more than 400 sections plus so many rules are also there.
 
Now there are two important things which have been added to this Companies’ Act. One is secretarial audit and the secretarial standard. So, there was a need that why can we not have some of the standard practice for the companies. And somewhere the section 118, sub-section 10 says that those two standard which is made mandatory, one is for the board meetings and the other one is for the shareholders’ meeting. So, these standards, where it has been said that all the companies will have to follow except those one percent companies. So, this is a good initiative.
 
NEW SECRETARIAL STANDARDS

Companies Act, 2013: Section 118 

(10) Every company shall observe secretarial standards with respect to general and Board meetings specified by the Institute of Company Secretaries of India constituted under section 3 of the Company Secretaries Act, 1980, and approved as such by the Central Government

Companies Act, 2013: Section 205

(1) The functions of the company secretary shall include,—
(b) to ensure that the company complies with the applicable secretarial standards; 

“secretarial standards” means secretarial standards issued by the Institute of Company Secretaries of India constituted under section 3 of the Company Secretaries Act, 1980 and approved by the Central Government

Doshi: So, essentially it is to standardise practices when it comes to how board meetings are conducted and general meetings or shareholder meetings are conducted.
 
Mehta: And one more thing, why the need was felt, because if you see more than 80 percent of the case which is pending before the company law board, if you see, those are all operation mismanagement, 397, 398, the erstwhile 1956 are derived from this, where the notice has not been issued to directors, these are all, people are just crumbling about these private limited company, a small company.
 
But, if you see the litigations are more in those private limited companies, just because the notice was not issued in time or the short notice was issued, the agenda was not even sent or probably placed in the meeting. So, somewhere this is a good attempt and a good initiative, I would say.
 
Doshi: Can you highlight for us some of the new practices that both these standards introduce?
 
Mehta: There are standards like, for example, we said that Quorum should be present throughout the meetings, which earlier anytime the person can come and go. And what we have stated that there has to be some serial number which has to be given to the minutes book and the circulation of minutes also two times you are circulating, one is draft and one is the...
 
Doshi: And you have prescribed time limits. So, once you send out the draft, if there is any response to the draft, it must come in within a certain time limit than the chair person has to sign it within a certain time limit and effectively you said that within 30 days of the meeting, the final minutes have to be circulated to all the board members. Let me add to that, for instance, you have said agenda and notes on the agenda shall be given to the directors at least seven days before the meeting.
 
Mehta: Yes.
 
Doshi: We have spoken of the draft minutes in that sense and the final minutes. You have also said that minutes once entered in the minutes book shall not be altered. All of this is to do with meetings of the board directors. But, I am just trying to provide some illustrations of some of the new features an the useful features in these standards. But there is some concern that maybe the ICSI has overreached, and let me bring you different facets of those concerns. The full Companies’ Act, 2013 with all 470 sections and six schedules is less than 300 pages. Your two secretarial standards are 30 pages. So, there is a great degree of detail and minutiae in those standards and some of that also translates into lots more paper work.
 
Mehta: Over a period of time as I said, corporate used to follow certain practice, so what we are trying to bring out is a good practice which we have tried to inbuilt in the standards. So, I do not know 30 pages what you are saying. It is a very small book, but then if you take it in an A4 size book, it works out to be something like a 7-8 pages.
 
But, yes, the standards were required. And let me tell you one thing, nowadays, you have those private equities and a lot of foreign institutional investors (FII) are investing money in the companies. So, somewhere also they are also more comfortable, rather they are the happiest person in the world because you have the agendas coming in the environment because most of the private equity company also have nominee directors on the board.
 
So, for them also it is something good because somewhere we have our standards in place now, so the company will have to follow the standards, they need to send those notice in advance, agendas in advance. Somewhere we are also stating that last minute agendas should not be, rather they should be discouraged and it has to be, if they are bringing it then certain process has to be followed.
 
Doshi: We appreciate all the new useful efforts, but there are several aspects of the standards that also are raising concerns like I said. So, for instance, let me tell you, in several places all the standards do is to repeat the act. So, for instance, it says, a notice convening a meeting shall be given at least seven days before the date of the meeting. Now, this is in the act. Any director may participate through electronic mode. This is in the act. Committee shall meet as often as necessary. This is in the act. The quorum for a meeting of the boards, should be on third of the total strength of the board or two directors whichever is higher, again, this is in the act. A general meeting shall be convened by or on authority of the board. This is in the act. So, I am not sure, why you have decided to repeat all of this in the standards.
 
Mehta; Maybe, some of them are repetitive. So, you can say those 30 pages can be reduced, maybe half of the things may be repetitive. But, yes, the objective is to give more of a clarity on the sections and the practice. And wherever the act is silent, somewhere the standard has given some kind of more of clarity.
 
Doshi: I will come to those areas. I want to bring up some more items to you from within the two standards. There are some items that you want to smile at. Each item of business to be taken up at the meeting shall be serially numbered. Did you need to put this down in the standard in any fashion? Directors who attend general meetings of the company and the company secretary shall be seated with the Chairman at an annual meeting. I am just not sure why you felt the need as a professional body to put all of this in the standards.
 
Mehta: As I said, just to have a uniform practice and more clarity, of course, when you say that company secretary sitting next to the chairman, because of course, chairman also needs some kind of support in the meetings.
 
Doshi: I have no objection to where the company secretary sits. I am just wondering why you have decided to prescribe all of this.
 
Mehta: It is, as I said, one is a law and the other is a good practice. So, we have taken that these are all practices, if the company follows and you have something like a uniformity.
 
Doshi: But, I do want to bring up, as you pointed out, that where the law has been silent, the standards have maybe opted to step in and I will give you the instances of that. For instance, no business shall be transacted at a meeting, if notice and accordance with this standard has not been given. Resolutions for items of business which are likely to affect the market price of the securities of the company shall not be withdrawn. No gifts, gift coupons or cash in lieu of gifts shall be distributed to members at the meeting. I understand the intent of what the standard is attempting to do, but I am not sure I can find any of these in the act. And if they are not in the act, can the standards prescribe something?
 
Mehta: Normally, whenever you are taking any item of the agenda like the bonus. So, if you are taking up the item, A, you discuss, deliberate and you say that you are not proceeding it. But, you cannot say that I have just dropped this item of the agenda.
 
Doshi: But, the act, I think, is silent and correct me if I am wrong, you are a corporate lawyer almost. The act is silent on the withdrawal of resolutions of this nature.
 
Mehta: That is what. Wherever the act is silent, we said, you should  follow the best practice.
 
Doshi: But the act is silent on many things. That is because the parliament has chosen not to say anything. For the ICSI to decide that we are going to speak when the parliament has chosen to stay silent seems a little odd.
 
Mehta: You will also agree, the standards which we have laid down, it is all what we are seeing, it is a summary of the good practices which the corporate should follow.
 
Doshi: Can the standards prescribe what the act has chosen not to prescribe? Just curious about that, I understand the intent.
 
Mehta: The act is silent. So, wherever the act is silent, through standards we tried to clarify or rather we are just giving those kind of practices, the best practice which company should be following.
 
Doshi: The reason why this concerns me is because from what I understand, these secretarial standards apply to all companies. So, listed companies, public companies, private companies, all companies except for one person companies. So, not only are they lengthy, not only do they have minutiae and great detail and therefore more paperwork, they could be in some ways described as onerous. Especially for private companies who may not have the where with all to do all this paperwork that you are demanding of them.
 
Mehta: Again, the intent is to follow the good practice.
 
Doshi: I understand, but practically you understand that small companies would find it difficult to follow these prescriptions.
 
Mehta: Standard says seven days notice, seven days agenda should be sent, this is very miniscule which if you are running the set up of a private limited companies [Interrupted]
 
Doshi: Standard also says the pages of the minutes book shall be consecutively numbered.
 
Mehta: Because, what used to happen, why we have litigations, somewhere the minutes have to be first or you have to replace the minutes. So, if you have a serially numbered, so you have those control. Otherwise you have any number of meetings and you have any paper meeting and then you say that this was the minutes. So, these are the practice. And I will tell you most of the good corporate house, they follow this numbering and all this practices.
 
Doshi: What is the penalty for non-compliance with these standards?
 
Mehta: If you are not complying the standard, I believe it is Rs 25,000 to the company and those officer if they are not following, Rs 5,000 per officer penalty.
 
Doshi: So, would you admit that this going to be difficult for smaller companies, private companies to have to comply with?
 
Mehta: If you see the case laws which are pending? These are all more than 80 percent of the case laws are with respect to the minutes. The board meetings are not being handled properly or convened properly.
 
Doshi: So, effectively what this means is private companies will have to hire company secretaries to be compliance with these standards?
 
Mehta: No. See, this standard can be, all those standards which we have suggested which any lay person can follow.

 
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