MCA amends Schedule IV in an attempt to align and exempt certain provisions

Inspite of the barrage of notifications, amendments, clarifications, MCA in an attempt to continue the tradition has issued another Notification[1] dated July 5, 2017, amending Schedule IV of the Companies Act, 2013. The Notification will come into force on the date of its publication in the Official Gazette, which we assume will be done soonest. Certain amendments have been made in line with the recommendations made in Company Law Committee Report.

This article discusses the impact of the amendment.

ParaNature of AmendmentProvisions after the AmendmentOur Analysis
Para III (12)

 

 

for the words “acting within his authority”, the words “act within their authority” shall be substitutedIII. Duties:

The Independent Director Shall-

 

“Xxx

(12) act within their authority, assist in protecting the legitimate interests of the company, shareholders and its employees;

xxX”

This is merely a grammatical change. Earlier the provision was indicating the authority of a single independent director, which has now been changed to refer to their authority as a member of Board and as an ID.

 

 

Para VI (2)

 

 

for the words “a period of not more than one hundred and eighty days”, the words “three months” shall be substitutedVI. Resignation or removal:

 

“Xxx

(2) An independent director who resigns or is removed from the Board  the company shall be replaced by a new independent director within three months from the date of such resignation or removal, as the case may be.

xxx”

This is in line with recommendation made in Para 11.2 of Company Law Committee Report in order to align with corresponding requirement under second proviso to Rule 4 (1) of the

Companies (Appointment and Qualification of Directors) Rules, 2014 as well as Reg. 25 (6) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, that provides a time-limit of not later than the immediate next Board meeting or three months from the date of such vacancy, whichever is later.

 

It is pertinent to note that practically, the amendment is not making sense because the Board will come to know about the vacancy in the upcoming meeting, which may at times be held within three months, thereby leaving the Board with no time to search the appropriate person to fill such vacancy. Therefore, the reducing the time span to such early period will cause much difficulties to the Board practically.

Para VII (I)for the words “in a year”, the words “in a financial year” shall be substitutedVII. Separate meetings:

 

(1) The independent directors of the company shall hold at least one meeting in a financial year,

without the attendance of non-independent directors and members of management.

This is in line with recommendation made in Para 11.4 of Company Law Committee Report. Para 2.3 of Secretarial Standard-1 mandated companies to conduct a separate meeting atleast once in every calendar year.

 

The current amendment overrides the requirement under SS-1 and accordingly, separate meeting is required to be held at least once in a financial year.

 

 

Amendment particularly for Government Companies

Insertion of a ‘Note’ after Para VIIIAfter paragraph VIII, the following note shall be inserted, namely:-

‘Note: The provisions of sub-paragraph (2) and (7) of paragraph II, paragraph IV, paragraph V, clauses (a) and (b) of sub-paragraph (3) of paragraph VII and paragraph VIII shall not apply in the case of a Government company as defined under clause(45) of section2 of the Companies Act, 2013 (18 of 2013), if the requirements in respect of matters specified in these paragraphs are specified by the concerned Ministries or Departments of the Central Government or as the case may be the State Governments and such requirements are complied with by the Government companies.

The following shall not be applicable:

Para IV. Manner of appointment;

and

Para V. Reappointment;

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Para II. Role and functions:

 

“Xxx

(2) bring an objective view in the evaluation of the performance of board and management;

 

(7) determine appropriate levels of remuneration of executive directors, key managerial personnel and senior management and have a prime role in appointing and where necessary recommend removal of executive directors, key managerial personnel and senior management;

xxx”

 

Para VII. Separate meetings:

assess the quality, quantity and timeliness of flow of information between the

management of the listed entity and the board of directors that is necessary for the board of directors to effectively and reasonably perform their duties

 

Para VIII. Evaluation mechanism.

 

These provisions will not apply to the Government Companies, if the requirements specified in these paragraphs are specified by the concerned Ministries or Departments of the Central Government or the State Governments, as the case may be, and such requirements are complied with by the Government companies.”

This Notification had provided exemption to Government companies from u/ s 152(5) wherein giving of a statement by the Board to the effect of having its opinion on fulfilment of conditions of the Act by the IDs and on the appointment being independent from the management in the explanatory statement u/s 102, was required. However, there was no exemption provided from schedule IV which provided similar requirement.

 

After the current exemption, many may get mistaken that independent directors of a government company are not required to be appointed in a general meeting which is not correct considering the provisions of section 152(2) whereby it is provided that the appointment of directors is to be made only at a general meeting. The process of selection/ appointment by the Board will however not be applicable considering the fact that the appointment of directors in Government companies are done by the respective Ministry.

 

 

In case of Government Companies, the Independent Directors –

 

1.       will not evaluate the performance of board and management;

2.       will not review the performance of non-IDs and the Board as a whole;

3.       will not review the performance of the Chairperson of the company;

4.       Will not determine remuneration payable to EDs, KMPs, SMPs;

 

In the separate meeting of IDs (only in case of unlisted companies) the IDs will only evaluate the assess the quality, quantity and timeliness of flow of information between the management of the listed entity and the board of directors that is necessary for the board of directors to effectively and reasonably perform their duties.

In case of Government Companies, all employees (including directors) are annually evaluated as per its own methodology, as per the PR Guidelines issued by DPE. The same may be viewed here.

 

Since the very inception of Act, there has been lots of ambiguity in regard to performance evaluation of directors in a Government company as the directors in such a company are appointed/ removed by the Government itself. In order to remove the difficulties faced by the Government companies, the Ministry vide its Notification dated 5th July, 2015 (July Notification) had provided certain conditional exceptions from reporting by the Board, of the evaluation process undertaken during the year u/s 134(3)(p), where the evaluation of directors is done by the administrative ministry in charge in terms of its own evaluation methodology.  However, no such exemption/ exceptions were provided in respect of schedule IV wherein performance evaluation was required to be carried out by the independent directors.

 

Further, remuneration of directors as well as employees for Government companies is also fixed by the pay commission set up by the respective Governments, therefore, it was a redundant requirement for the independent directors to determine remuneration of the directors and other employees in such companies.

 

Therefore, from the above analysis, it is clear that the Notification will mainly affect the Government Companies. Though, these amendments should have been a part of the exemptions issued to the Government Companies by MCA vide its Notification dated June 5, 2015, notwithstanding the delay, such exemptions will always be welcomed by the Government Companies. However, the major relaxation to the Government Companies provided by MCA will not be benefitting the listed Government companies until SEBI also comes out with similar changes in the Listing Regulations.

[1] http://www.mca.gov.in/Ministry/pdf/AmendmentIV_06072017.pdf

by Nikita Snehil (corplaw@vinodkothari.com)

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