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Company directors face tougher times

GONE ARE the days when company directorship was considered to be a cushy job carrying prestige, power and perks with few responsibilities. Following corporate scandals in India and abroad in recent times, the law governing directors has been made more stringent through a series of amendments to the Company Law in India. The Companies (Amendment) Bill 2003 introduced in the Rajya Sabha on May 7 is bound to give them more worry as it contains dozens of amendments casting new responsibilities on company directors.

In the past, directors were appointed on a company board either on the strength of their shareholding in the company or at the behest of the promoters. Except in the case of government appointed directors or nominees of financial institutions, they needed the goodwill of the promoters. They could hardly be expected to function with real independence.

In contrast to this, the new Bill proposes to make it mandatory for every public company, with paid-up capital and free reserves of Rs 5 crore or a turnover of Rs 50 crores and above, to have a minimum of seven directors (The present limit is three), the majority of whom be "independent'' directors. It is also contemplated to make it mandatory to have women directors in public companies. Even if the independent directors are appointed with the promoter's votes, they will have to exercise their independence and best judgment while evaluating and reviewing the functioning of their companies. They should not be afraid to blow the whistle when justified. The audit committee shall have only independent directors.

Public companies with less than 50 shareholders and not having any debt or funding from the public, banks or financial institutions are, however, exempt from the requirement of having a minimum seven directors with a majority of independent directors.

The Bill lays down many qualifications for independent directors. They should have had no pecuniary or blood relationship with the company management. This is to ensure real independence, free from interest conflicts. It will be no easy job identifying persons with business orientation along with these qualifications.

Considering the onerous nature of their new role, they would expect to be rewarded well for such "independent" functioning. However, even the existing provision regarding payment of sitting fee to directors and separate professional fees for their services otherwise than as directors is proposed for deletion! This would mean that they have to be remunerated for the services only as directors and only if there is profit.

There is a far reaching proposal (not found in any other country) which requires that a candidate to be appointed as an independent director should have taken training from an institute recognised by the Centre within two years before his appointment.

However, if he is appointed an independent director, he should complete the training within 18 months. It is not known why this training is not compulsory for non-independent directors and what is the moral and statutory responsibility of the independent directors for decisions taken with their participation before they complete their training. Besides, the boards will have different classes of directors - managements' directors and independent directors and trained and untrained directors.

The Bill seeks to discourage outsiders frivolously trying to get elected to the boards of public companies and private companies that are subsidiaries of public companies. It is stipulated that the outsider should enjoy the consent of at least a hundred shareholders or one per cent of the voting power in the company and also deposit a sum of Rs. 10,000 to qualify as a valid candidate for the election.

If he fails to get the votes of at least one per cent of the total number of votes cast on the resolution, he will forfeit the deposit. Such a loser cannot also be appointed as additional director till the next annual general meeting is concluded. Removal of a director from office and appointing another person in the vacancy by outsiders have also been made difficult.

New disqualifications

Section 274(1) of the Act already lists out many disqualifications for directors. Two more disqualifications have been stipulated and these arise from nonpayment of interest on debentures and conviction for defaults punishable with imprisonment. If a director continues to act despite disqualifications, he can be fined which may extend to Rs.5,000 per day of such continuance and also imprisoned up to three years.

The Bill seeks to place the maximum age limit at 75 for persons holding office of director in a public company and a private company that is subsidiary of a public company. This assumes that the directors would be physically fit and mentally alert up to 75 years. The number of part time directorships that can be held by a working director is reduced so that they can allot more time and do justice for their whole time jobs.

Directors are now far required to meet once in a quarter and this allowed long gaps between two meetings. It is now proposed to make it mandatory to have board meetings at intervals not exceeding three months. Board meetings can be held even through teleconferencing and video conferencing, but the minutes thereof shall be valid only if all the directors of the said meeting approved and signed the minutes subsequently. This will help reduce absence of directors at board meetings (particularly those in outstations or in other countries) and facilitate consideration of the views of all the directors on important matters.

In many public companies, where financial participation by banks and institutions is absent, the need for giving written notice to directors is not taken seriously. The present bill proposes that directors shall be notified in writing about the board meetings along with the agenda seven days before the meetings. However in emergency situations, the notice period can be curtailed with the consent of the directors. In the case of public companies with paid up capital and reserves exceeding Rs 10 crores, such emergent meetings shall be valid only if the majority of independent directors attends.

More deliberations encouraged

The provisions regarding delegation of powers for circular resolutions have been tightened. Circular resolutions need to be ratified at a subsequent meeting of the board or the board committee and made part of the minutes of such meeting. Henceforth the directors will be required to personally meet, discuss and approve (and not through circular resolutions) balance sheet, profit and loss account and directors report, diversification of business, amalgamation, merger and reconstruction of companies, contribution to charitable and other funds, takeover/acquisition of substantial interest in other companies and granting of loans, giving guarantees and provision of security for loans. Disposal of a company's undertakings will not be as easy as before. Financial limits per annum for such disposal are being imposed. These changes will fasten more responsibilities on the directors for greater deliberation before approval. This provision may be dubbed as anti-liberalisation and restrictive in the current times when the demand is for giving more powers to the board and the members to restructure their business for facing the competition.

The Companies Act was recently amended fixing a minimum paid up share capital for private and public companies. The Bill stipulates that if the companies fail to enhance the capital to the prescribed limit and on the striking off of such company's name from the register of companies, each director and shareholder will bear unlimited liability.

Vanishing act discouraged

To put a stop to the phenomenon of vanishing companies, special measures at the time of incorporating new companies are proposed. This would include obtaining two copies of photos of all subscribers (promoters) of the company and their witnesses with proof of identity and other precautions..

Companies will be allowed to hold general meetings on Sundays, which will enable more shareholders to attend and obtain clarifications from the directors. Investors who are in employment have always had a feeling that by holding the meetings on working days, managements were preventing investors' attendance and this complaint is now removed.

To sum up, the noose is tightening around the neck of indifferent corporate governance. If the directors desire to be on the right side of the law and perform their role well, they will have to be more vigilant and aware of the new legal provisions and their duty to all the stakeholders. The bill seeks to achieve better accountability and credibility on the part of the directors, improve the climate for stricter compliance and hopefully, draw the common investors back into the capital market.

P. T. Rangamani

(Past President of the Institute of Company Secretaries of India)

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