SEBI’s move towards bringing a balanced Board Structure

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-By Kirti Sharma (corplaw@vinodkothari.com)

Background

The Securities and Exchange Board of India vide its Board Meeting held on 28th March 2018 has accepted some of the recommendations of the Uday Kotak Committee on Corporate Governance. One of such accepted recommendations was the recommendation for separation of the role of Chairperson and MD/CEO for top 500 listed entities by market value with effect from April 1, 2020. What will be the impact, here is an anlaysis.

Provisions under the Companies Act 2013 & SEBI LODR Regulations, 2015

Proviso to Section 203 (1) of the Companies Act 2013 states that

“Provided that an individual shall not be appointed or reappointed as the chairperson of the company, in pursuance of the articles of the company, as well as the managing director or Chief Executive Officer of the company at the same time after the date of commencement of this Act unless,—

 (a) the articles of such a company provide otherwise; or

(b) the company does not carry multiple businesses:

 Provided further that nothing contained in the first proviso shall apply to such class of companies engaged in multiple businesses and which has appointed one or more Chief Executive Officers for each such business as may be notified by the Central Government.”

Part E of Schedule II of SEBI LODR Regulations, 2015, which provides for the discretionary requirements for the listed entities-

“D. Separate posts of chairperson and chief executive officer

 The listed entity may appoint separate persons to the post of chairperson and managing director or

chief executive officer.”

Rationale behind the proposed changes in the Committee Report

The Uday Kotak Committee Report[1] expressed that with the same person holding both the roles of the Chairman & Managing Director limits the board’s independence to question the management. The segregation of these powers shall bring in a more balanced board structure and an effective control over the management.

The separation of powers of the Chairperson (i.e. the leader of the board) and CEO/MD (i.e. the leader of the management) is seen to provide a better and more balanced governance structure by enabling better and more effective supervision of the management, by virtue of:

a) providing a structural advantage for the board to act independently;
b) reducing excessive concentration of authority in a single individual;
c) clarifying the respective roles of the chairperson and the CEO/MD;
d) ensuring that board tasks are not neglected by a combined chairperson-CEO/MD due to lack of time;
e) increasing the possibility that the chairperson and CEO/MD posts will be assumed by individuals possessing the skills and experience appropriate for those positions;
f) creating a board environment that is more egalitarian and conducive to debate

Practice Worldwide

Several corporate governance codes for best practices across the globe recommend this, a few jurisdictions require it, and many companies are actively debating whether to undertake it. The Committee has noted that in some jurisdictions, such as the U.K. and Australia, this debate has tilted in favour of separating the two posts. In other countries, such as France and the U.S., the issue continues to be vigorously debated. Countries with a two-tier board structure, such as Germany and the Netherlands, separate the top board and top management roles.

In this regard, the Committee also noted the rationale of the United Kingdom’s Cadbury Committee in the Report of the Committee on the Financial Aspects of Corporate Governance (1992) that “given the importance and the particular nature of the chairmen’s role, it should in principle be separate from that of the chief executive. If the two roles are combined in one person, it represents a considerable concentration of power”.

Effect of the proposed change

With the segregation of the role of the Chairperson and Managing Director/CEO, the board shall function more independently. Separate roles of the Chairman and Managing Director shall bring in a balance of power and authority reinforcing their independence and accountability.

 

[1] http://www.nfcg.in/KOTAKCOMMITTEREPORT.pdf

MCA introduces form AOC 3A – form for submitting abridged financials for Ind-AS applicable companies

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– By Nikita Snehil ( corplaw@vinodkothari.com)

MCA vide its notification[1] dated February 27, 2018 has amended the Companies (Accounts) Rules, 2014, as per which the following proviso shall be inserted in Rule 10 which deals with statement containing salient features of financial statements referred in 1st proviso to sub-section (1) of Section 136 –

“Provided that the Companies which are required to comply with Companies (Indian Accounting Standards) Rules, 2015 shall forward their statement in Form AOC-3A.”

Therefore, the introduction of Companies (Accounts) Amendment Rules, 2018 (‘Amended Rules’) will lead to the following:

Financial to be submitted in form Applicability
AOC-3 Companies to which Ind AS is not applicable for FY 2017-18
AOC-3A Companies to which Ind AS is applicable for FY 2017-18

The format of the said form has also been provided in the amended Rules, however, the e-version of the form is awaited.

Further, the format also specifically provides for the contents of the salient features of the Director’s Report which may be referred to by the companies furnishing the abridged financial statements in e-Form AOC-3A as a matter of good governance.

[1] http://www.mca.gov.in/Ministry/pdf/CompaniesAccountsAmmendmentRule_01032018.pdf

Revised Section 42: What’s in the name!

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By CS Vinita Nair (corplaw@vinodkothari.com)

Section 42 has been substituted by way of section 10 of Companies (Amendment) Act, 2017[1]. Draft rules amending Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014 have been issued for public comments[2].

Erstwhile section 42 dealt with ‘Offer or invitation for subscription of securities on private placement’. Substituted section 42 has been titled as ‘Issue of shares on private placement basis’. This leads to a general perception that revised section 42 shall not apply to issue of non-convertible debentures on a private placement basis. It will only apply in case of issue on preferential basis considering corresponding amendment in section 62 (1) (c)[3].

Relevance of marginal note

It is a well settled view that marginal note cannot control/ limit the provisions of the section. In case of Chandroji Rao vs Commissioner of Income-Tax, M.P[4] Hon’ble Supreme Court explained that the marginal heading cannot control the interpretation of the words of the section particularly when the language of the section is clear and unambiguous. There are several other rulings of Hon’ble Supreme Court reiterating the aforesaid interpretation.

Modes of issuance of securities under Companies Act

Chapter III of Act, 2013 deals with prospectus and allotment of securities. Part I deals with public offer and Part II deals with private placement. Section 23 (1) provides the manner in which a public company may issue securities viz.;

  1. by way of public issue by complying with provisions of Part I; or
  2. through private placement by complying with provisions of Part II; or
  3. through rights issue or a bonus issue in accordance with section 62 (1) (a) and section 63 respectively.

Section 23 (2) provides the manner in which private company may issue securities viz.;

  1. by way of rights issue or a bonus issue in accordance with section 62 (1) (a) and section 63 respectively;
  2. through private placement by complying with provisions of Part II.

Private placement under Act, 2013

‘Private Placement’ has been explained in section 42 to mean any offer or invitation to subscribe or issue of securities to a select group of persons by a company (other than by way of public offer) through private placement offer-cum-application, which satisfies the conditions specified in the section.

While the marginal note refers to issue of shares, the meaning of private placement clearly refers to ‘securities’. Given the intent under section 23 (1) and (2), it is clear and unambiguous that any private placement of securities will be subject to compliance of provisions of section 42. It cannot be interpreted that ‘securities’ referred in Section 42 refers to the expression, “shares or other securities” explained in Rule 13 of Companies (Share Capital and Debentures) Rules, 2014.

Discussion in CLC Report[5] on issue of debentures by private placement

“3.8 At the moment, in case of non-convertible debentures a prior special resolution only once in a year has been prescribed. The Committee recommends that since Non-Convertible Debentures are pure borrowings and do not form part of equity capital, the proviso to Rule 14(2)(a) may be amended to prescribe that the relevant board resolution under Section 179(3)(c) would be adequate in case the offer under Section 42 is for debentures up to the borrowing limits permissible for Board under section 180(1)(c) of the Act. This would also align the requirements with that of section 180(1)(c). It was, however, felt that the said Board resolution should clearly mention (in the body of the resolution) that the offer of debentures being approved by Board is through private placement under Section 42 and certain other minimum details as may be prescribed in the rules be provided in the Board resolution. Private companies (who have been given exemption from Section 117(3)(g) through section 462 notification) should either be required to file board resolutions under Section 179(3)(c) or pass a special resolution.”

As stated above, the intent was only to exempt the requirement of seeking shareholder’s sanction if the company had already obtained approval of shareholders u/s 180 (1) (c). Apart from this, compliance of entire section is required to be ensured.

Conclusion

Companies should be careful and not interpret that section 42 shall not apply to private placement of debentures. Otherwise, the company, its promoters and directors shall expose themselves to huge amount of penalty.

[1] Yet to be enforced.

[2] http://www.mca.gov.in/Ministry/pdf/DraftCompaniesProspectusSecuritiesRules2018_15022018.pdf

[3] (c) to any persons, if it is authorised by a special resolution, whether or not those persons include the persons referred to in clause (a) or clause (b), either for cash or for a consideration other than cash, if the price of such shares is determined by the valuation report of a registered valuer subject to such conditions as may be prescribedof a registered valuer, subject to the compliance with the applicable provisions of Chapter III and any other conditions as may be prescribed.

[4] 1971 SCR (1) 422

[5] Company Law Committee Report – February, 2016

Presentation on corporate structuring and regulatory framework

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