Monday, February 15, 2016

The Companies Law Committee on Section 117 and Appointment and Remuneration of Managerial Personnel

[The following guest post is contributed by Amitabh Robin Singh, who is an Associate at DSK Legal]

In an earlier post, this author had discussed the proposed changes made by the Companies Law Committee (“Committee”) to Chapter 3 (Prospectus and Allotment of Securities) of the Companies Act, 2013 (“2013 Act”). In this post, a particular observation of the Committee, which stretches between Chapter 7 (Management and Administration) and Chapter 12 (Meeting of Board and its Powers), will be discussed. Also light will be thrown upon certain recommendations of the Committee regarding Chapter 13 (Appointment and Remuneration of Managerial Personnel).

The Committee rejected the concerns raised, which requested doing away with the requirement to file board resolutions in the form MGT-14 pursuant to Section 117(3)(g) of the 2013 Act. Section 117(3)(g) refers to the matters for which a board resolution is to be filed in the form MGT-14 by directing one’s attention to Section 179(3) for a list of the particular resolutions which are required to be mandatorily filed.

Section 179(3) lays down a laundry list of 10 matters which are mandatorily to be filed due to the reference in Section 117(3)(g) such as to borrow monies, to grant loans or give guarantee or provide security in respect of loans, to approve amalgamation, merger or reconstruction, etc. The 11th item in the list refers to other matters which may be prescribed.

Interestingly, to grant loans or give guarantees or provide security in respect of loans or invest in the securities of any other body corporate, a unanimous board resolution is required.[1]

This leads us to Rule 8 of the Companies (Meeting of Board and its Powers) Rules, 2014 (“MBP Rules”) which prescribed a further 9 matters for which the board resolutions were to be filed in the form MGT-14 such as to take note of appointments or removals of one level below Key Management Personnel, to take note of the disclosures of directors’ interest and shareholding, etc.

The requirement to file certain board resolutions in the form MGT-14 has been running through various regimes over the past two years (since Section 117 and 179 were enforced on April 1, 2014). For the first phase from April 1, 2014 to March 18, 2015 both public and private companies were required to file the board resolutions passed in all 10 of the matters mandated in Section 179 of the 2013 Act and also all 9 of the matters further prescribed in Rule 8 of the MBP Rules.

However on March 18, 2015 the Companies (Meeting of Board and its Powers) Amendment Rules 2015 (“MBP Amendment Rules”) were notified which reduced the matters for which the resolutions were to be filed pursuant to Rule 8 of the MBP Rules from 9 to 3. Post the MBP Amendment Rules, only making political contributions, appointing and removing key managerial personnel and the appointment of internal auditors (in pursuance to Section 138) and secretarial auditors (in pursuance to Section 204) were retained in Rule 8 of the MBP Rules.

Then on June 5, 2015 the Ministry of Corporate Affairs issued a notification exempting private companies from certain provisions of the 2013 Act (“Exemption notification”). Pursuant to the Exemption Notification, private companies were exempted from Section 117(3)(g) of the 2013 Act and hence by extension Section 179(3) and the remaining 3 matters prescribed in Rule 8 of the MBP Rules. Hence, private companies have been exempted from having to file board resolutions altogether in pursuance to Section 117(3)(g) of the 2013 Act.

There had been concerns raised to the Committee that the requirement of filing board resolutions involved the disclosure of sensitive business information such as to authorize a buy-back of securities, financing plans, proposed amalgamations, etc. However, the Committee did not accept this argument and opined that the filing of such resolutions in the form MGT-14 ensured that they were not tampered with and such filings could be used to ensure the correctness of the documents.

This question of confidentiality had been touched upon in the Companies (Amendment) Act, 2015 (“Amendment Act”), which came into force on May 29, 2015. The Amendment Act added a proviso to Section 117(3)(g) which stated that no person shall be entitled under Section 399 to inspect or obtain the resolutions filed in pursuance to Section 117(3)(g). Section 399 of the 2013 Act provides for the inspection of documents filed with the registrar by any person. However the leading language of this sections says “Save as otherwise provided elsewhere in this Act” so this provision has been used to insert the proviso to Section 117(3)(g) to exempt these resolutions from inspection.

The Committee has said that while the filing compliance should continue, the Ministry of Corporate Affairs may assuage the fears of companies by publicizing the provisions in the online MCA 21 system to ensure confidentiality.

However, the Committee did recommend that an exemption from Section 179(3)(f) which relates to granting of loans may be given to banks due to the fact that it may violate the confidentiality obligations that the bank has towards its customers.

As we can see, the Committee is adamant on the need of the filing of form MGT-14 for the board resolutions (by public companies now) for the matters specified in Section 179(3) and the remaining matters in Rule 8 of the MBP Rules to maintain proper records and to protect investors by holding companies to the resolutions which they have filed.

Moving on to the recommendations of the Committee regarding Chapter 13 of the 2013 Act, the Committee recommended that the framework for paying of remuneration to managerial personnel in companies with losses or inadequate profits (which is governed by Schedule V, Section II of the 2013 Act) should be relaxed to make it easier to attract the best talent to turn around such loss making companies or companies with inadequate profits and lead them back to good fiscal health. Currently the limits on remuneration for such companies are provided in Schedule V depending on the effective capital[2] of the company.

Currently, the limits provided in Schedule V may be doubled if the company passes a special resolution to that effect. On this note, the Committee has recommended that this special resolution be amended to be made an ordinary resolution in the case of the managerial person satisfies certain criteria such as not being a promoter or related to a promoter, etc.

These limits have actually gone up from the Companies Act 1956 (“1956 Act”) to the 2013 Act, for example the lowest bracket of remuneration was capped at Rs. 75,000 per month while the lowest bracket in the 2013 Act is capped at Rs. 30,00,000 per annum. However the Committee recommended that these newer and comparatively higher limits be further increased to attract the best talent.

The Committee also recommended doing away with the requirement for central government approval for breaching the limits given in Schedule V and in its place other safeguards such as higher penalties and additional disclosures be inserted instead.

The Committee also went on to recommend that the current mandate in Schedule V requiring central government approval if a person has not been resident in India continuously for the last 12 months is to be appointed as a managing or whole time or managing director be done away with. So that a person may be brought into an Indian company immediately as a managing or whole time director and will not be required to work in some other capacity in the Indian company simply to have him/her satisfy the 12 months residence criteria. Many companies would just drop the idea of having such a foreign director looking at the current provision, which may hurt the company. This recommendation will stop that from happening if made into law.

Going by the recommendations of the Committee on the provisions discussed above, the Committee wants to loosen up the norms on remuneration of managerial personnel to bring more talent into Indian companies and give them more liberty to appoint and remunerate their managerial personnel with minimal government approvals.

- Amitabh Robin Singh

[1] Section 186(5), Companies Act, 2013
[2] Effective capital is calculated by taking the aggregate of the paid-up share capital (excluding share application money or advances against shares); amount, if any, for the time being standing to the credit of share premium account; reserves and surplus (excluding revaluation reserve); long-term loans and deposits repayable after one year (excluding working capital loans, over drafts, interest due on loans unless funded, bank guarantee, etc., and other short-term arrangements) as reduced by the aggregate of any investments (except in case of investment by an investment company whose principal business is acquisition of shares, stock, debentures or other securities), accumulated losses and preliminary expenses not written off.

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