37th National Convention of the ICSI- An overview

The convention with over 1000 delegates, Minister of Corporate affairs as invitee, people from various parts of the country….yes it is the Grand 37th National Convention of the ICSI held from 5-7th November 2009 at Hotel Mariott, Hyderabad.

Being a local resident of Hyderabad, I had it easy to locate the venue. There were about 10s of counters for registration of delegates and thanks to Hyderabad Chapter, I had my delegate number that helped in getting the kit within no time. The kit was a beautiful black laptop bag, with pens, a few business cards, a t-shirt with ICSI logo in the front and Bajaj Allianz logo on the back (which was dissented by many) and brouchers from the sponsors. After the long queue at the entrance, I entered the convention hall which was decorated professionally with a big screen for clear view of the happenings on the dais, a balcony to accommodate delegates that wouldnot fit into the convention hall, ICSI banners, sponsorship banners, a big welcome screen behind the dais, etc.

Skipping the minute details of the lighting of the lamp and Council members taking the dais let me get into the happenings straight away. The curtain raiser that gave an insight into the 3-day programme was organized very well. The Awards for best chapter and other categories including moot courts and related stuff were well-organised but the award winners were concentrating more on photographs being taken rather than the big trophy in their hands. The release of convention souvenir, Secretarial standard 10 and other ICSI publications had the Council members showing off their teeth and flashing the publications rather than anything else. The host who announced the names was amateur and a lot shaky. Probably the Hyderabad chapter could have chosen a better host for such an important event.

Mr Salman Khurshid, Minister of Corporate Affairs was the guest for the inaugural session, believe me…he was simply superb in delivering his message to the members. He was crisp and to the point. A politician having such indepth knowledge of the subject along with command over the language is quite unbelievable.

The first technical session on Managing growth in turbulent times had many delegates dozing off while Mr Pramanik was delivering his message. But, Ravi Kashtia and Jim Brady were interesting speakers. They highlighted on ways and means to manage growth with their slight humour.

I don’t prefer going into the nitty gritty of each technical session, but each speaker was excellent and an expert in his subject. Especially the dynamism and sharpness exhibited by Ms Vijaya, CS of Bharati Airtel is worth mentioning.

I didn’t prefer to stay back for the cultural evening and dinner that followed.

The second day of the convention started off with 5K run for a cause…well, I didn’t participate again. After that, a special breakfast for women was organized. This had 3 speakers; one from Administrative wing of the AP govt, one industrialist and another was a founder of well known social welfare organization. We even had the first Woman president of the ICSI and First ICSI-SIRC chairperson with us. Each one had different insights into the women problems, ways and means to tackle them. The bottom line was to have a good networking circle amongst ourselves to better our personal lives.

The open house session with the central council members was good. Many of the CS had different sorts of complaints on the response of the Ministry or the council or the student services. There were also many satires on the working of the ICSI which were intelligently handled by the Prez ICSI

Thereafter, the technical sessions are as usual boring stuff which had many delegates going out for networking or discussing business and some were dozing off, myself being one of them.

This was followed by a brief lunch that did not have soup but had plenty of fruit salads and other goodies. There was separate section for non vegetarians too.

The trip to Ramoji film city (RFC) was a chaos with so many delegates ending up into confusion whether to get into a bus or not. The entry at RFC was organized well, the stunt show was over crowded and so was the Action theatre. The tour through the RFC was excellent with an enthusiastic guide explaining each and every thing in detail with a pinch of wit. Most of us felt that the time was insufficient as it started to get dark by 6 PM itself.

The hot coffee on one hand, cookies on the other with the serene blue sky overhead and neatly towed green grass underneath was a superb experience. At 7 PM the cultural show began under the blue sky. There were dance performances, one minute game shows for the participants, comedy stints by well known comedians and few gymnastic wonders by the RFC people.

Dinner was also served simultaneously and this has a separate section for Jain food too. As dinner was coming to an end, it started to rain cats and dogs and the pleasant evening was forcibly wound up at 8.30 which would have been at 10 PM otherwise.

The day 3 of the convention began with a breakout session on M&A under competition regime and Tax reforms simultaneously in two different halls. The speakers for M&A were wittier than others of their genre and the delegates had an excellent time in understanding the concept.

This was followed by an interactive session with the Jt Secretary to MCA, a dynamic lady with elegance and intelligent charm of her own. She coordinated the session, took all the inputs from the delegates and briefed the members on the happenings at the ministry, the efforts put in by them and the like. Overall, the session was lively and highly useful for the members present.

The Valedictory session was the most emotional part as it was the point where all the delegates part away with a promise to meet at the next National Convention. The Prez ICSI gave a brief overview of the 3-day convention, thanked the delegates, organizers and all those who made the convention a grand success. He also highlighted the records that were broken at the convention. The 3-day convention came to an end with a special lunch.

LAZY BANKING

In 2005 managerial autonomy to PSBs by leaving assorted decisions (acquisitions, closure of unviable branches, opening overseas offices, human resource policies) to boards was highlighted as a part of de-regulation of the Government. The buzzwords then were "competition, corporate governance, and independent directors". But the buzzwords now are "government control" and government is not to be confused with governance.

The nationalization of banks in 1969 was aimed t improve credit delivery, expand the areas of banking in rural India and encourage the small-scale industries. Nationalisation was introduced to further regulate the Banking industry apart from the RBI and the Banking Regulations

Apart from Nationalising Banks, restrictions were imposed on composition of boards of directors and on bank lending to units that directors were interested in. But then, credit delivery or populism of the late 1960s and early 1970s was only one part of the jigsaw. This statement can be observed from the preamble to the Banking Companies Act of 1970 wherein it is stated that "an Act to provide for the acquisition and transfer of the undertakings of certain banking companies, …….. in order to control the heights of the economy …………….and for matters connected therewith or incidental thereto." The key word was 'control', but not regulation. Opposition to privatisation of public sector enterprises isn't about strategic sectors and market failure. It is about losing control. The heights of the economy became the depths.

The fiasco of nationalization was extended and the fall out was seen in September 2006 that wrought havoc in many ways. First, since government equity was declining and public shareholding increasing, the number of independent directors was slashed. Second, possibility of nomination from SEBI, NABARD and public financial institutions was removed. Third, the number of full-time directors was doubled (from two to four). Fourth, "excess" directors were made to retire, on a first-in first-out criterion, that is, on basis of seniority. Fifth, SEBI'S attempt to push corporate governance was a problem, since SEBI'S suggested draft amendment to Clause 49 of the Listing Agreement proposed that directors nominated by government or public financial institutions wouldn't be counted as independent directors.

The expression “lazy banking” was coined a few years ago to describe the “Public Sector Banks” and their way of banking. The desks at Public Sector Banks are strewn with papers, bulletins and what not…and every one seems to know what exactly is demanded of them. But again, this did not change anything not even the credit delivery in the least.

The nomination of Independent Directors has turned out to be a matter of graft and reward and their expertise never entered the rulebooks of the Banking industry. Probably a CRAZY Banking approach to the banking formulation will wipe away the lazy Banking in India.

The Lazy banking has resulted in corporate India generating income without availing the Bank Credit which is a severe indictment of Indian banks and this inertia is a symptom of deeper malice.

During 1998-2003, the Banks ignored Lending to commercial sector and the funds were extensively invested in Government Bonds. Ironically, this strategy did not harm banks. The cut in interest rates by the RBI in 1999 the Banks that invested in Bonds profited. The Banking sector earned huge profits irrespective of whether the profiteering Bank was a weak one or otherwise. These profits were utilized to the “cleaning of Bank’s Balance sheets “popularly known as wiping off Bad debts and raising of capital.

On the other hand, denial of credit to industrial sector worsened the small players in the market. In other words, our banks were more comfortable funding the fiscal deficit rather than private commercial activity. Gratuitous perversity in Indian banks is observed and that is coined as the Lazy banking.

The era of Lazy banking can also be attributed to the Industrial recession that created a fever amongst the Bankers about CBI raids for wrong credits.

The worst days of lazy banking are now over. Over the past, because of the economic recovery, credit to industry has been growing considerably. The focus has shifted back to loan growth. Most of the demand till now has come from working capital. And the bond market is no longer that attractive - bond prices have plunged and bond issuance is bound to suffer as the government cuts its fiscal deficit.

Yet, the recent episode of lazy banking throws up many hard questions. These questions should become part of the current debate on banking reform, which is hopelessly stuck on whether foreign capital should be allowed into the Indian banking industry. The good health of Indian banks is worthy of celebration. But what if this health has been achieved by not lending to the economy?

Bank nationalisation has been demonised for a number of valid reasons. Politicians used the banking system to dish out loans to favoured interest groups, and directly contributed to the huge bad loan problem of later decades. Capital was misallocated. But what is not adequately appreciated is the fact that the policy of bank nationalisation was actually a success in terms of its key goal - spreading the banking habit in the country and providing credit to small companies and farmers.

The first round of banking reforms in 1992 was partly responsible for the credit squeeze of the past five years, especially because of capital adequacy norms that made lending to the government more attractive than before. While Indian banks will have to deal with many issues ranging from capital adequacy to globalisation - they will also have to ensure that small companies and farmers, who form the bedrock of the Indian economy in terms of output, employment and exports, are not starved of credit. And this lending should be done in a way that earns profits.

Fortune favours the quick adapter. The year 2006-07 was challenging in several ways. Treasury income, their mainstay in the earlier part of the decade, went down appreciably as bond prices sagged and yields rose under intensifying demand for money, even as the government put far less paper in the market. With ‘lazy banking’ options closed, commercial lending was all the rage, but here too, there were the RBI-delivered shocks—higher risk weightages in creamy sectors like housing loans, apart from two CRR hikes in rough conjunction with repo and reverse repo rate hikes aimed at vacuuming liquidity and preventing froth.

But with the economy in boom, banks were not short of business—not even depositors, it turns out, though this took a tax-sop nudge from the finance ministry. The funds crunch scare did not quite materialise.

The Reserve Bank has also been periodically issuing guidelines on public grievance redressal mechanism in banks, including constitution of customer service centers. Based on the recommendations of a Committee on Procedures and Performance Audit of Public Services for ensuring improvements in quality of service rendered, banks were advised to constitute a Customer Service Committee of the Board. In the Reserve Bank, the Customer Service Department has recently been constituted to, inter alia, serve as the interface between customers and banks.
On a broader plane, the Reserve Bank has been adopting a two-pronged strategy to generate greater awareness and expand the reach of banking services – which can be termed as empowerment and protection. As regards the former, financial inclusion is the first stage of the process. This is strengthened by inculcating awareness among the masses through financial education. Concurrently, an advisory mechanism in the form of credit counseling is being encouraged to help distressed borrowers and bring them within the fold of formal finance. As regards protection, a Banking Codes and Standards Board of India has been established recently to ensure a comprehensive code of conduct for minimum standards of banking services to be offered by banks. The revised Banking Ombudsman Scheme has been put in place to redress deficiencies in customer service by banks.

The economy is presently in a phase of rapidly rising incomes, rural and urban, arising from an expansion of extant economic activities as well as the creation of new activities. Corporate profitability has exhibited sustainable trends and consumer incomes are increasing rapidly, riding on the growth momentum. All of these developments suggest that the demand for financial services, both for savings as well as production purposes, will be greater than has been the case in the past, and there will be many new entrants in need of financial services who have not hitherto been served. At present our financial depth is much lower than that of other Asian countries, though it has picked up in the recent past. While there is evidence of an increase in financial deepening, particularly during the present decade, the increase in the breadth and coverage of formal finance has been less than adequate. Deepening the financial system and widening its reach is crucial for both accelerating growth and for equitable distribution, given the present stage of development of our country.

There has been a burst of entrepreneurship across the country, spanning rural, semi-urban and urban areas. This has to be nurtured and financed. It is only through growth of enterprises across all sizes that competition will be fostered. A small entrepreneur today will be a big entrepreneur tomorrow, and might well become a multinational enterprise eventually if given the comfort of financial support. But we also have to understand that there will be failures as well as successes. Banks will therefore have to tone up their risk assessment and risk management capacities, and provide for these failures as part of their risk management. Despite the risk, financing of first time entrepreneurs is a must for financial inclusion and growth.

The Parliament passed the Credit Information Bureau Act last year and the guidelines for its implementation will be released shortly. This should enable, over time, the availability of credit histories of both individuals and small businesses, which will help significantly in reducing transactions and information costs for banks. It will also help in spreading the credit culture among borrowers. It should help banks greatly in assessing and managing risk at low cost.

As poverty levels decline and households have greater levels of discretionary incomes, they will be first time financial savers. They will, therefore, need to have easy access to formal financial systems to get into the banking habit. Banks will need to innovate and devise newer methods of including such customers into their fold. The importance of 'no-frills' account and expanding the range of identity documents that is acceptable to open an account without sacrificing objectivity of the process in this milieu can never be over-emphasised. Banks will need to go to their customers, rather than the other way around.
The micro-credit and the Self Help Group movements are in their infancy but are gathering force. More innovation in the form of business facilitators and correspondents will be needed for banks to increase their outreach for banks to ensure financial inclusion. New entrants to the banking system need households at their doorstep.

To conclude, with increasing liberalisation and higher economic growth, the role of banking sector is poised to increase in the financing pattern of economic activities within the country. To meet the growing credit demand, the banks need to mobilise resources from a wider deposit base and extend credit to activities hitherto not financed by banks. The trend of increasing commercialisation of agriculture and rural activities should generate greener pastures, and banks should examine the benefits of increasing penetration therein. Financial inclusion will strengthen financial deepening and provide resources to the banks to expand credit delivery.

Source of Capital - The Private Equity

The investment by Private equity partners in the Indian corporate sector is gaining momentum in spite of the turbulent economic scenario. Though in its nascent stages, Private Equity (PE) investment has assumed the status of mainstream source of capital. While India Inc is gearing to share its financial stake in the otherwise family-run enterprises, analysts raise fears that the quick exit of PE partners from these investments would leave companies high and dry.

Private equity investment was highly opposed in the 1970’s where the business tycoons developed the flip by taking over a company, attack wages and jobs to ‘cut away fat’, then sell back to the market in a three to five year cycle. The most common use of this system for profit stems where management teams buy out publicly listed companies and take them off the stock market as private entities.

The practice reached its zenith in the 80s when major takeovers were attempted by firms for their practice of taking healthy companies, selling their assets, firing much of the workforce and then selling back a shell to the public markets. The Private Equity market died down in the 90s, as mega-mergers placed many of the big players beyond the reach of even major private equity groups and confidence dimmed in the risks of investing during an economic downturn.

However in the last 4-5 years, where several major funds buy in to reach for larger targets, the economy has witnessed some of the biggest companies in the world targeted by the PE players.

PE investments have played a visibly positive role in generating employment opportunities and especially BPOs have benefited tremendously as PEs put their money in these ventures. PE can also drive a company into good governance, bringing in transparency and professionalism across industry. The PE partners usually induct their representative at Board level to assist the management in executing the strategies. They also enable entrepreneurs achieve success that may otherwise have been beyond reach by providing resources over and above money.

The broad framework of PE deal:

1. Time Frame: Though time is a factor of flexibility, a typical PE transaction takes roughly about 3 months to conclude.
2. Monetary Aspects: Money can be availed through any other form of funding. But, money alone cannot catalyse the working of the organisation.
3. Mutual Interest: The PE deal has to be aligned with the interest of the Promoter, execution capability, mutual comfort and the like.
4. End Utility: The PE partners should be ensured of Performance linked convertible to bridge the expectation gap, if any.
5. Success Factor: Success of PE Fund is dependent on success of the venture. PE funds make sure that their star entrepreneur are helped with all the resources and learning which can be mustered by the fund to help him realise his dream.
6. Agreement: Shareholders and Subscription agreement is the crux of a PE deal and one must ensure the inclusion of the following:
• Minority protection rights
• Rights and obligations of each party
• Force majeure
• Exit proviso
• Tag along rights, etc
7. Exit of PE partner: The PE partners prefer IPO as the exit route but other exit routes such as trade sale are often practiced. This is because, PE funded companies enjoy higher PE multiple at listing, than their contemporary non PE funded companies.


Conclusion:

Essentially, PE funds raise money from high net worth individuals, financial institutions, etc. for a period of seven-ten years and then invest in opportunities as and when they arise, either in early-stage, maturing or even public companies. The work involves of course, valuing the companies and deciding how much of the company stake is actually worth, what the company’s growth prospects are, etc. Structuring the transactions for tax-efficiency and industry-specific reasons is also part of the job. Post-stake taking, day-to-day monitoring and growth plans are monitored by the fund, with a senior director taking a seat on the company’s board. Since the target is also to exit the investment in a few years and return money to investors, the deal teams also constantly monitor the capital markets for suitable times to do an Initial Public Offering or find a strategic investor to sell to.

COMMON SEAL – Relevance in Today’s Corporate World

The Common Seal – often referred to as the signature of the corporate entity is more often than not deemed as the substantial mark of identification for the corporate entity in question. However, in today’s computerized corporate scenario, Common Seal has lost its gloss and has come to exist more as a ritual than a requirement. Today, Common Seal hardly used in any document other than the Share Certificates and even this is been reduced on a day by day basis with the advent of “Demat Accounts”.

Common Seal and the Provisions in Law:

a) Section 34 of the Companies Act, 1956 specifies that every company on incorporation should have common seal for corporate use.
b) Article 84 of Table A of Schedule I of the Act also indicates that the board shall provide for a Common Seal and this seal shall be affixed on a document only on the authority of the Board or a Committee of the Board, and also specifies the process to be adopted for any such affixation.
c) Section 50 empowers the companies to have official seal for use outside India.
d) The guidance note on Compliance Certificate also specifies that the companies should maintain a register of documents sealed containing the information on date of sealing, details of the document, people in whose presence such document was sealed, etc.
e) Companies (Issue of Share Certificate) Rules, 1960, provides that all share certificates of a company are required to be issued under the Common Seal.
f) SS-8 Common Seal of the company has a very critical importance in the functioning of the company. It is the signature of the company to any document on which it is affixed and binds the company for all obligations undertaken in the document.

Rules and Regulations around the usage of Common Seal

1. At the first Board Meeting of the Company, the common seal of the company is adopted by means of a resolution.
2. The common seal of the company must be under the safe custody of authorised director/officer.
3. A Board Resolution should be passed for affixing the Common Seal in any instrument. A committee of directors may also authorise the affixing of Common Seal. The resolution must also authorise at least two directors and the secretary or other persons who shall sign the instrument in token of their presence.
4. The authorised person shall sign and affix the Common Seal on the document/ share certificate(s) in the presence of the authorised directors/secretary.

The provisions above indicate that the framers of law expected the management of companies to seal every document requiring the approval of the company in line with the then prevailing English Law. This might have been relevant and apt during the pre-computer era, but with the electronic communication gaining momentum and the rise of dematerialized share certificates, the need to have a Common Seal needs to be revised. The seal in fact, is a relic of the days when medieval barons used their rings to make a characteristic impression as their approval.

It is not compulsory that common seal should be of specific shape or metal but the company name should be engraved on it. The use of seals, whether in wax, lacquer or embossed on paper to authenticate documents is a practice as old as writing itself. Apart from preventing forgery, the presence of an unbroken seal indicated that the sealed document had not been tampered with.

A look into the purpose and usage of common seal in current transactions is warranted to examine the real need for the law to have the concept of Common Seal.

Although the Companies Act continues with the regulations for a Common Seal, it is clear that failure to affix the Common Seal on any deed or document by itself will not absolve the directors of their liability. Failure to affix the Common Seal cannot be a ground on which the company can escape its obligations.

For all practical purposes, the common seal is as good as dead. Eventually, it is the overall circumstances of a given case that would weigh with the courts and not the mere affixation or otherwise of the Common Seal on a document or an agreement. Thus, the Common Seal of a company is no more as revered as it used to be. According to the Apex court, merely due to the absence of a resolution, the contract could not have been held to be invalid or illegal. Panchanan Dhara & Others vs Monmatha Nath Maity (Decd.) thru L.RS. [2006] 131 Comp Cas 577 (SC).

The Act does not say that it is compulsory for a Company to have a Common Seal. If a company is floated without share capital or with shares in electronic form, then it is not illegal for such company to operate without a Common Seal. There is no concept of Common Seal in partnership form of businesses. But in company form of business, it denotes the signature of the company and every company shall have its own Common Seal. Limited Liability Partnership form of business may have its own Common Seal, depending upon the terms of the Agreement.

The transactions today are just a click–away where real-time execution of documents takes place across various time zones, without even the requirement of face-to-face meet of the parties involved. There are very few cases today, where one of the parties insists on affixing the Common Seal, but that is not necessarily based on the requirement of a statute. Of course, in some cases where pre-structured documents mandate affixing the Common Seal, the use of seal cannot be dispensed with, unless by mutual consent of the parties involved.

The Government is currently finalizing significant and widespread changes to the Companies Act, 1956 through Companies Bill, 2009 in line with recommendations from various committees. As a part of this process, the merits of retaining the Common Seal as part of the statute book can be reviewed and probably dispensed with, to be in line with the existing global practices. However, it may be noted that in the New Companies Bill, 2009 Section 48 of the Companies Act, 1956 is retained as clause 21, while Section 50 of the same Act is scrapped.

Enactment to Law – Need, Viability and Implementation

The other day I received an email forward detailing approximately 1074 Enactments in force in India. It took almost an hour just to read the title of the Act and understand the subject to which it relates. The number is mind boggling when we realize that each Enactment has sections, sub sections, explanations, provisions and amendments.

Given the background, it is not surprising if one wakes up a fine morning and finds himself receiving a notice for violation of law, a law that he has never heard of!!! It is highly impossible for human mind to keep a track of all the enactments that apply to him in personal/ professional life. Even an expert may fail at times to comply with the laws of the land in such complex scenario.

On a lighter vein, an erstwhile judge, Justice Nani Palkhiwala mentioned that the law is made difficult for the layman to enable the survival of legal professionals. But today, the number of Enactments has increased to such a number, that it is impossible even for a legal professional to survive without the threat of non-compliance.

The constitutional ideology of India believes in passing an Enactment for each and every trivial issue, thus increasing Enactments in high numbers. These Enactments when combined with amendments, press notes, circulars, notifications and the specific terminology used in these contexts, make it highly impossible for human minds to comprehend.

The complicated Indian law further complicates the process of legal drafting thus making it impossible for a common man to either understand the law or draft a legal document. The skill of draftsmen lies in making his draft very clear with simple language restricting the use of complicated legal terms. More often than not, a new draft is just a variation of a previously prepared draft with minimal changes in the particulars section.

The Indian Constitution and law were drafted way back when India became independent. Though the constitution was “inspired” by the British law, it was well applicable to the erstwhile independent India. However, the scenario in the country changed over the past 60 years wherein India witnessed a transformation from agriculture based country to an industry based country and now to a technological base for the world.

In this scenario, most of the rules, regulations, laws and Enactments enforced on 26th January 1950 have become obsolete in every sense. There was an Enactment drafted in 1956 with a cross reference to a different Act. However, the Act in question is not available in black and white even with the law houses. In this case, the Enactment could not be put into practical use without actually referring to the Act.

In view of the same, there is an urgent need to make Indian Law more practical and sensible to cope with the current state of affairs. However, the law makers of the country turn a blind eye towards implementing new laws in the place of obsolete ones because it works best to support their political motives. As a result, an “Amendment Act” was passed whenever a law was found unsuitable for a particular situation.

Adding to the woes, implementing of the Acts passed by the Parliamentarians is an achievement in itself. The members on the Committees formed to draft the Bill are drawn from different classes who, in most cases lack the practical knowledge about the industrial trends and hence, in most cases; such drafts seem to be a write-up rather than a practical law. The drafts are passed by the Parliament and Bills once passed are thrust upon the users who end up cracking their brains to understand the brains behind the law.

When such a law comes into force, there is a general unrest in the industry and the lead Associations of the particular industry make a representation to the Law-makers who come up with Amendment, Rules or Clarifications adding up to the bulk of already existing law books in India.

On the other side, when such Act is passed, non-compliant parties pool in their resources to find a loophole in the law and ward off punishment as the law makers have to find how to deal with such a situation. Law Breakers are intelligent than Law Makers – True in every sense.

This is the very reason why most of the MNCs would insist on adopting their law subject to the jurisdiction of a court in their country in case of disputes before inking a deal with Indian companies particularly in the IT and ITES sectors, where India is a stalwart. This is a proof of non-belief that global majors shared about the Indian legal system when they have complete faith in manpower and the intellectual resources of India.

Instead, it would be more prudent for the law makers to repeal the existing law, and pass a totally new Enactment corresponding to practical requirements to the industry. Before passing a Bill, a draft can be circulated to the persons of high standing in the society like Associations who can foresee the difficulties at the proposal stage itself. The suggestions received from such wider circulation, can be incorporated in the draft and then passed by the Parliament. Such an approach will, to a large extent reduce the requirement of passing the Amendments, or issuing Departmental Clarifications or the like.

Also, it would be prudent to conduct a critical review of the existing laws in India and take steps towards reducing the Acts by repealing the obsolete ones, consolidating the similar ones, draft a single Act in place of numerous Amendments and so on.

A shorter list of Acts applicable to an individual or an entity will be easier to implement and restrict non-compliances and escapades from law. This would pave way for clearing all the pending cases in various Indian courts and a belief in the Indian legal system could be reinforced lest Indian legal system becomes a laughing stock in the days when India is shining in the global market.

ADHERING TO NON-MANDATROY SECRETARIAL STANDARDS????

Secretarial Standards – recommendatory but not mandatory!!! This in itself provides adequate reason and scope for non-adherence to Secretarial Standards. And this is the common scenario in almost every company today where in the Executive Management decides to cut-down costs by doing away with the ‘recommendatory’ Secretarial Standards. However, Accounting Standards are followed to the point because these are ‘mandatory’.

In such situations, what should be the ideal response from a Company Secretary – to invoke legal parameters or implement ideal practices? The best-suited response should be a combination of both.

The Companies Act and rules are procedural legislations, which provide the following framework:
- What a company can do??
- How the same can be done?
- What is not allowed?

This has paved way for the emergence of a “technical solution”, which is a viable solution within the framework of the prevailing law and then may add what would be a prudent corporate practice in line with the high professional standards, ethics, and the Secretarial Standards.

The Company Secretary should be more of a Conscious Keeper of Corporate Standards than being an intelligent and glorified clerk who keeps an account of legal compliance technically. The role of a Company Secretary is to find out the best possible procedure to cater to the requirements of the company all the while being within the framework of the Companies Act. A balancing act between rules, regulations, laws and Secretarial Standards is the prominent role of a Company Secretary in today’s corporate world.

Most of the practices outlined in Secretarial Standards such as approving the accounts by Circular Resolution, are “legal but not ethical”. However, after the extensive deliberations, the consensus is in favour of giving the legal/technical solutions coupled with what should be prudent corporate/ good governance practice.

In the Indian corporate sector, the unspoken word from the Company Management to the Company Secretary is observing law is your job; earning profit is our job. In such situations, the right course of action for the Company Secretary would be to provide a legal solution and depending on the counter-party’s inclination, advising on the applicable prudent practice would be the right decision.

However, the crux of the job is to justify the need for implementation of the Secretarial Standards initiated for the first time by the ICSI. It is crucial to prove that the proper implementation of the Secretarial Standards will usher in uniformity in divergent corporate practices. It is essential to understand that Secretarial Standards will facilitate good corporate governance in the country. Further, it is critical to convince that adherence to the Secretarial Standards will elevate the company's reputation in the corporate sector.

In the era where Corporate Governance is the buzzword in the corporate sector, it is not difficult to convince the managements about the utility and results of adopting the Secretarial Standards in the functioning of the company.

If the Company Secretary profession is to grow, have a respectable place in the corporate world then one has to follow legal jurisprudence. The Profession of Company Secretaryship has grown from Government Diploma to a full-fledged course and professional membership.

The onus is on the Company Secretaries to establish the Secretarial Standards as not only a pioneering movement, but also a noble endeavor. Standardization of practices is the need of the hour to establish a professional outlook about the Indian Corporate Secretary in the global economy. The progressive Corporate Houses in the country tend to make special efforts to show that they practice good corporate governance and implementing the Secretarial Standards has been one of the significant components of these efforts.

With more and more companies opting to implement Secretarial Standards, it should be easier for ICSI to convince the regulators to take into consideration the real practices in the sphere and give statutory mandate for the same.

Commercial and Legal Standing of Executive Directors vis-à-vis Non-Executive Directors

As per practical definition, Non-executive Director means any director who is not paid a salary. However, the Managing Director is termed as an Executive Director, even if he is not entitled for any salary emoluments. In view of these definitions, is there actually any significant difference between the Executive Director and the Non-Executive Director?

On commercial parlance, many companies practice to designate employees as Executive Directors, who are actually not on the Board of the company. In the absence of clear definitions in the Companies Act, 1956, it is a general understanding that any employee who is also a Director is called an Executive Director. But according to the regulatory requirements, an Executive Director is an individual holding managerial position and bestowed with decision-making powers for his whole-time service to the company. Further, Form 25C is required to be submitted for appointing a person as Whole-time Directors and the same is not required for Executive Directors.

Explanation to section 197A, it is cleared that a Non-Executive Director does not undertake to devote his whole working time to the company. Whereas an Executive Director in the nature of a whole-time director, extends his professional service to the company


The latest trend in the corporate sector is the appointment of an “Associate Director” of a particular department. However, there is no clear explanation as to whether an Associate Director will join the Board of Directors, whether Form 32 needs to be filed, and is this individual considered a Whole-time Director as he is engaged in the day-to-day business activity of the company? As the company cannot induct all the top Executives to the Board or designate them as Whole-time Directors, the idea of a new role called Chief Executive Officer (CEO) was initiated.

In the absence of any provision in the Articles of Association of the company, the Non-Executive Director is not obligated to tender his resignation to the Board and seek the acceptance from the Board. To ward off any future complications, such Non-Executive Director can send a copy of the resignation to the relevant Registrar of Companies.

Remuneration:

1. The company can pay up to 1% of its profits as remuneration to the Non-Executive Director without breaching the provisions of Schedule XIII, as the this Schedule makes provisions for the remuneration to be paid to Managing Director, Whole-Time Director and Executive Director.

2. Also, in case there is more than one Executive Director, then as per Schedule XIII the total managerial remuneration should not exceed 10% of the profits. However, the corresponding tabular representation should be followed for each individual separately as per the terms of the appointment.

3. An approval from the Central Government is required if the remuneration paid to the Non-Executive Director exceeds the limit set forth in Schedule XIII. If any Director holds any key responsibilities in the company, the prime test for payment of remuneration would be to check whether such Director be considered as a Non-Executive Director; because by virtue of the nature of work, such Director will be automatically treated as an Executive Director.

4. Only a Whole-time Director or an Executive Director is eligible for Sweat Equity Shares as per the provision of Section 79A

5. The premium paid by the company on "Employer – Employee Insurance Policy" for its Executive Directors and handing over the same to such Directors after three years will be treated as perquisite and will for a part of the relevant Directors' remuneration.

Conclusion:

However, in practice the appointment of Non-Executive Independent Director has become a arrangement of convenience with the idea of “Good Corporate Governance” going for a toss. Unless such Independent Directors have significant stakes in the company, it will be naïve to assume that they would be allowed / willing to assert their independence. After all, Non-Executive Directors do get attractive remuneration, not to boast of a good standing in the corporate society, and they would not jeopardize this opportunity by being too assertive or independent in real sense. Also, only directors with real involvement will take active interest in the affairs of the company and contribute to its obligations to shareholders, employees, customers, suppliers, etc.