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.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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