Role of the Company Secretary in Corporate Governance Framework

This is a vitally important period for corporate governance in India. After many false starts and delays, significant progress was made in the reform of company law with the completion of a comprehensive review in 2005 and the laying before the Lok Sabha the Bill. Any satisfaction that might have been felt as a result of these positive steps was cut short soon after, however, with the emergence of the Satyam scam in the beginning of 2009. India today, is consequently well places to avoid falling into the trap of responding only to the immediate crisis as has been the case in the United Kingdom and the United States in the past. For example, the changes sought by the Sarbanes-Oxley Act, while responding to the problems immediately evident in the aftermath of the Enron and other scandals, left large areas of corporate governance untouched notwithstanding that reform of these would predictably have had a greater beneficial effect. It is important, then, not to fixate on the problems most obviously exposed by the Satyam scandal, but to look at the issue of corporate governance in India in the round when considering what the response should be. Having said that, it is pertinent to note that, good corporate governance involves a commitment of a company to run its business in a legal, ethical and transparent manner- a dedication that must come from the very top and permeate throughout the organisation. That being so, much of what constitutes corporate governance has to be voluntary. Law and regulations can, at best, define the basic framework, but they too have fundamental limits in the enforcement of better corporate governance which must not be crossed. The Bill, adopting the principles as aforesaid, seeks to bring all corporate entities under a common framework for their regulation irrespective of their areas of operation. It has provided for a procedure wherein there is to be responsible self regulation with disclosures and accountability.

The principal responsibility in this regard has been entrusted on the CS, who has been given an alleviated position in the corporate hierarchy. The subsequent sections enunciate the provisions of the Bill which entrust on the CS greater responsibilities in relation to corporate governance. The subsequent section considers its suitability and whether there is need for further strengthening.

Increased stature in the corporate hierarchy

Terming the CS as a Key Managerial Personnel (hereinafter KMP) under Clause 2(zza), the Bill vide Clause 178 requires that every company belonging to such class or description of companies as may be prescribed shall have whole-time key managerial personnel.  Any vacancy arising in case of vacancy in the office of a KMP, the board has to fill the same. Each of the 3 classes of KMPS are independent and mandatory, and any vacancy arising in the office of the KMP, is to be filled up by the Board within a period of six months from the date of such vacancy. In case of any default in this regard, the company would be penalised Rs. 1,00,000 and every director and KMP in default- Rs. 25,000.This makes it aptly clear that the Companies Bill has strengthened the position of Company Secretaries and enhanced their place in corporate hierarchy. Company secretaries in old law were merely entrusted with administrative and ministerial duties now they are been legislatively put as KMPs.

Responsibility vis a vis Internal Regulation

The scope of annual reports and the role the CS with regard to it has also been widened vide Clause 82. It now includes, besides the existing disclosures, the disclosures related to Corporate Governance practices in the company as well as certification of compliance™s and disclosures.

Furthermore, the Annual Return of every company is now required to be signed by a Director and a Company Secretary, or where there is no Company Secretary, by a Company Secretary in whole-time practice.

The provision has been strengthened further in case of listed companies and companies having such paid-up capital and turnover as may be prescribed. The Annual Return in these companies is also to be signed by a Company Secretary in whole-time practice certifying that the annual return states the facts correctly and adequately and that the company has complied with all the provisions of the Act, in the prescribed form. This implies that in case of a listed company, even if the Annual Return is signed by the Company Secretary in employment of the Company, it will further be required to be signed by the Company Secretary in whole-time practice. Also, in case of a company having such paid-up capital and turnover as may be prescribed even if the company is not listed, the Annual Return will also be required to be signed by the Company Secretary in whole-time practice. Further the Company Secretary in whole-time practice will not only certify that the annual return states the facts correctly and adequately but also that the company has complied with all the provisions of the Act i.e. give a compliance certificate.

The Bill vide Clause 107 of the Companies Bill makes it mandatory for every company to observe such secterial standards as may be prescribed with respect to General and Board Meetings. It implies that due processes as laid down in the Secretarial Standards will have to be followed thereby enhancing the role of Company Secretaries.

The Bill has also recognized the CS to be appointed as registered valuers (Clause 219(2)), interim/company administrators in respect of rehabilitation of sick companies (Clause 234), company liquidators (Clause 250) and considered them eligible to become a Technical Member of National Company law Tribunal, if he is practicing for at least twenty years.

The mandatory reporting of the General Meetings within 30 days of its conclusion(Clause 109),  the enhancement of penalties for each offence with deterrence for repeated defaults, the fixation of duties and liabilities of Directors, and the revised framework for regulation of mergers and amalgamation, insolvency, rehabilitation, liquidation and winding up of companies not only as a liquidator/administrator but also to represent them before the Tribunal are some measures aimed at regulating corporate governance which would increase the reliance that companies would now have on their CS.

Need for further strengthening

The changes mostly are a welcome change and do go a long way in establishing considerable authority of the CS over matters relating the internal regulation, but could be made more effective by some further changes.

Companies today follow diverse secretarial practices. This since the companies are to practice such secretarial standards as have been decided in their general body meetings. It is the submission of the researcher that these standards must be made uniform on the lines of the accounting standards. An effective model to be followed could be the one proposed by the  Institute of Company Secretaries of India. The Secretarial Standards are formulated by them are a set of principles which companies are expected to adopt and adhere to, in discharging responsibilities and could integrate, consolidate, harmonize and standardize these secretarial practices.

Other measures which could be taken are that of making the penalty of non appointment of KMP a continuing one as in the case of section 383A(1A), after the expiry of six months. Furthermore, the appointment of a Practicing Company Secretary should be by way of a resolution passed at the meeting of the members on the same lines as appointment of Statutory Auditor. There may also be a mandatory secretarial audit apart from a financial audit which is currently required. Such an audit would give an independent assurance of compliance of the complex web of laws and rules and regulations which govern the functioning of a company.

Conclusion- an ideal time for India to establish a global position

Good corporate may not be the engine of economic growth, but it is still quintessential for its proper functioning. Good corporate governance practices can help increase investment, decrease corruption and reduce the wasting of scarce resources. The new Companies Bill seeks to establish new benchmarks for corporate governance in comparison to the existing framework under the Companies Bill 1956. It can be said that today, India has a golden opportunity to take the lead in corporate governance innovation rather than follow the developments in the United States and the United Kingdom. The time for such change may also be ideal for India can, given the state of world economies, send a clear signal of intent with regard to corporate governance to the global financial market and build on the favorable position that it appears to occupy in relation to other emerging economies.

Tags: Company SecretaryICSI

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