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CEOs as deemed Managers: Ascertaining their true role and liability

Sharon Pinto, Manager, corplaw@vinodkothari.com 

Introduction

The Board of directors of a Company typically comprises of executive and non-executive directors. The Board is supported by the Key Managerial Personnel (‘KMP’) and senior management i.e. personnel of the company who are members of its core management team excluding Board of Directors comprising all members of management one level below the executive directors, including the functional heads. KMPs have been defined under Section 2 (51) of Companies Act, 2013 (‘Act’/ ‘CA, 2013’) to include Chief Executive Officer (‘CEO’) or Managing Director (‘MD’) or Manager, thus placing them on the same pedestal while differentiating the said posts on the basis of mere nomenclature. Due to the said differentiation in nomenclature, it is often seen that companies have a practice of regarding the person designated as CEO different from Manager of the company. Thus, the person holding a position at the head of the organisational hierarchy, is interpreted to not be the Manager on account of only being designated as CEO of the company. The result of this rationale / categorisation results in avoidance of the restrictions and procedures for appointment and remuneration as enlisted under the Act under Section 196 and 197 which specifically prescribe that the terms of appointment shall be placed before the shareholders, for a Manager in case of appointment of a CEO.

The position of a ‘Manager’ in the corporate organisational structure has been around for decades. It has been defined under Companies Act, 1956 which can also be seen in the Companies Act, 2013. In recent times, corporates have developed a pattern of designating the head of the corporate organisation, with substantial powers of the management, as CEO who is often a professional, rather than designating the said person as Managing Director or Manager and appointing them on the Board. A few examples of such corporates which have the CEO as the head of the organisation include Microsoft, Pepsico, Google Inc, etc.

We have in our previous article[1] deliberated on the various combinations of KMP positions that can legally be held by two different individuals. In this article we shall discuss the concept of CEO and analyse whether the same is different from the positions of a Manager and MD.

Concept of CEO

  • Companies Act

The term CEO was not mentioned under Companies Act, 1956. It was included and defined under the Act, 2013 and formed part of the definition of KMP. As per the Report of JJ Irani Committee[2], as KMPs play a significant role of formulating and executing company policies. Thus, in order to provide a legal recognition to KMPs and also to define their liabilities arising out of such a position held, the committee recommended the following to be identified as KMP:

  1. Chief Executive Officer (CEO)/Managing Director
  2. Company Secretary (CS)
  3. Chief Finance Officer (CFO)

The committee further recommended key managerial personnel including WTDs and MDs shall not be in whole time employment of more than one company.

The report of the Company Law Committee[3] dated February 2016, recommended that a whole time KMP may hold more than one position in the company in order to reduce cost of compliance and to facilitate optimum utilisation of their skills and competencies. The committee further recommended flexibility in appointing other officers of the company in whole-time employment as KMP, pursuant to which the definition of KMP was expanded to include ‘such other officer, not more than one level below the directors who is in whole-time employment, designated as key managerial personnel by the Board’ under its ambit.

Section 2 (18) of the Act defines a CEO as ‘an officer of a company, who has been designated as such by it.’ Thus the position of CEO is designation oriented and the role is not specifically defined under the Act. Therefore, a person performing the role of any other KMP as specified under the Act, may be designated as a CEO.

  • Listing Regulations

Regulation 2 (1) (e) of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations’), have defined CEO as the person so appointed in terms of the Act. The erstwhile Listing Agreement vide Clause 49 (IX) stated as follows:

“The CEO, i.e. the Managing Director or Manager appointed in terms of the Companies Act, 1956 and the CFO i.e. the whole-time Finance Director or any other person heading the finance function discharging that function shall certify to the Board that:”

In order to harmonize the provision with the newly inserted definition of KMP under Companies Act, 2013, the said clause was amended[4] as follows:

“The CEO or the Managing Director or manager or in their absence, a Whole Time Director appointed in terms of Companies Act, 2013 and the CFO shall certify to the Board that :”

The above-mentioned provision also specifies that CEO shall be the officer so designated by the Company, who may have the role of a Manager or a Managing Director on line with the specification under the Act.

Analysis of the role and function of CEO, Manager, MD

The Act under Section 2 (53), defines Manager as ‘an individual who, subject to the superintendence, control and direction of the Board of Directors, has the management of the whole, or substantially the whole, of the affairs of a company, and includes a director or any other person occupying the position of a manager, by whatever name called, whether under a contract of service or not’. Whereas an MD is defined under Section 2(54) as ‘a director who, by virtue of the articles of a company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs of the company and includes a director occupying the position of managing director, by whatever name called. In Regina v. Boal, (1992) BCLC 872 (CA[5]), it was held that assistant general manager of its bookshop, had responsibility for the day to day running of the shop but had been given no training in management, health and safety at work or fire precautions. Thus only those who were in a position of real authority, who had both the power and the responsibility to decide corporate policy would be construed to be ‘Manger’ for the purpose of the Act. It also needs to be noted that the person occupying the position of a ‘Manager’ should be under the superintendence of the Board.

Thus, the definition of Manager can be construed to be function based, irrespective of the designation of the individual. The same has been held in the SC judgment of Ramchandiram Mirchandani v. The India United Mills Ltd., AIR 1962[6] wherein the apex court held that the definition of the word “manager” is very wide, and whatever be the nomenclature employed by the parties, if large powers of management of substantially the whole business of the company are vested in a person then that person becomes the manger. In Basant Lal v. The Emperor[7] it was held that it was held that a person who is not in charge of the entire business of the company cannot be deemed to be a manager. In the case of Commissioner Of Income-Tax, Kerala Vs.Alagappa Textile (Cochin) Ltd. 1980[8], the Supreme Court held that Manager must be an individual, having the management of the whole or substantially the whole affairs of the company, subject to the superintendence, control and directions of the Board of Directors in the matter of managing the affairs of the Company. The key difference between a Manager and an MD is that an MD has substantial powers of management and is also on the Board of the company, while a Manager has the management of whole or substantially the whole of the business of the Company. There are judicial precedents that indicate that while both enjoy substantial powers of management, the source from which this power arises is different. In case of manager his power is natural and in case of an MD, it has to be entrusted by the Board in him.

On perusal of the above roles of the MD and Manager, basis the provisions, it is evident that an individual who has been entrusted with whole or substantial powers of management, shall be said to be performing the role of a Manager. Further, if the said individual is a director of the company he may be designated as the MD. However, companies may choose to designate the individual otherwise i.e. CEO of the company, if the said role and powers of management rest with the concerned officer. Thus, one can opine that the person who is at the top of the corporate hierarchy, with whole or substantially whole powers of the management and affairs of the company, in cases where not explicitly designated as ‘Manager’ shall be deemed to be a Manager of the company. CEO is a designation and the position of Manager is based on function. Merely, by not designating an individual as a Manager, compliance under the provisions of the Act cannot be avoided.

Compliances relating to appointment and remuneration

As per the analysis stated above, the procedure and restrictions relating to the appointment of a Manager shall be applicable to a CEO who holds such a position of a deemed Manager of a company. Thus, the company is required to comply with the provisions of Section 196 for appointment of such a person. The term of the deemed Manager shall not exceed 5 years at a time, wherein the re-appointment shall be done not less than 1 year before the end of the term. Further, the appointee shall have to satisfy the criteria and conditions specified in sub-section 3 of Section 196 in order to get appointed. As per the said provisions, the terms of the appointment and remuneration will be subject to approval of shareholders. Further, Part I of Schedule V has set forth certain conditions to be fulfilled in order to be appointed as a Manager. In case of appointment in variance of these conditions, the company in addition to approval by shareholders, is also required to obtain approval from the Central Government by stating the rationale of appointing such a person.

Similarly, the provisions relating to managerial remuneration specified in Section 197 read with Part II of Schedule V as applicable to a Manager shall be applicable to a deemed Manager. Thus the deemed Manager shall be entitled to remuneration as per the limits specified in this regard under Section 197 subject to approval of shareholders. Therefore, while determining the cap of total managerial remuneration i.e. 11% of the net profits of the company, the remuneration paid to CEO who plays the role of deemed Manager will also be required to be included. If there is an increase in the said cap, it will require approval from the shareholders of the company. Further, the said provisions also place a bar on the individual limits of remuneration paid to the Manager, which shall not exceed 5% of net profits of the company in case of not more than one MD/WTD/Manager and 10% of total remuneration payable to more than one MD/WTD/Manager. If the company wishes to pay in excess of the limits thus prescribed it may do so by obtaining approval of the shareholders in the form of a special resolution.

In case the company has inadequate or no profits, it is required to abide by the limits prescribed under Part II of Schedule V subject to approval of shareholders. Further, in case the company wishes to pay in excess of the said thresholds, the shareholders approval will be required to be obtained in the form of a special resolution.

The above-mentioned provisions of the Act do not cover the appointment and remuneration of KMPs other than MD, WTD and Manager. Since the CEO is considered to be different from Manager, their appointment and remuneration in many cases are not approved by the shareholders of the Company. However as per the analysis stated above, in case of a CEO having substantial powers of the management and being on the head of the organisational hierarchy, there is a need that their terms of appointment and remuneration to be paid is placed before the members of the company.

Circumstances which would result in consideration as deemed Manager under the Act

Particulars of cases Whether Manager under the Act Rationale
Branch Manager × A Branch Manager does not have whole or substantial powers of the management of the company in addition to not being under the superintendence of the Board.
Factory Manager × Similar as in the case of a Branch Manager, a Factory Manager has limited powers relating to a specific unit of the company.
CEOs appointed for specific business verticals of the company × As the powers and responsibility of the said CEO would be limited to the specific business division of the company and would not entail overseeing the overall affairs of management.
CEO where the company has a separate MD or Manager × In case the company has an MD, the powers of the MD shall include substantial control over the management and affairs of the company as per Section 2 (54) of the Act.
CEO where the company does not have an MD or Manager In case of no MD/Manager, the CEO shall be the deemed Manager of the company on account of having whole or substantially whole powers over the affairs of the company.
Person designated as CEO and MD A Manager as defined under Section 2 (53) includes a director occupying the position of a Manager, by whatever name called.

Conclusion

The intent of defining KMPs of the company separately under the Act was to ascertain the legal liability and to define their roles on account of them being the visionary and executive authority carrying out the policies and functions of the company. With power comes responsibility and it is lucid from the discussion above that the person having the requisite powers would be subject to the restrictions and procedures prescribed under the provisions in this regard, irrespective of the designation assigned to the post.

 

Kindly find below additional resources on the above-discussed topic:

  1. http://vinodkothari.com/?s=remuneration
  2. http://vinodkothari.com/wp-content/uploads/2018/10/Appointment-and-Remuneration-of-Managerial-Personnel.pdf
  3. http://vinodkothari.com/wp-content/uploads/2019/09/Manangerial-Remuneration_IMTB-_26.08.pdf
  4. http://vinodkothari.com/2018/09/managerial-remuneration-a-five-decades-old-control-cedes/
  5. http://vinodkothari.com/2018/10/applications-with-cg-for-managerial-remuneration/
  6. http://vinodkothari.com/wp-content/uploads/2018/09/Defaulter-companies-to-seek-lenders-nod-to-pay-managerial-remuneration-1-1.pdf

[1]http://vinodkothari.com/wp-content/uploads/2017/03/The_Combinations_of_KMP_positions_in_a_Company_Unravelling_a_mystery.pdf

[2] https://www.mca.gov.in/bin/dms/getdocument?mds=TRnXREiyG027hEwjF77x3w%253D%253D&type=open

[3] https://www.mca.gov.in/Ministry/pdf/Report_Companies_Law_Committee_01022016.pdf

[4] https://www.sebi.gov.in/sebi_data/attachdocs/1410777212906.pdf

[5] http://www.uniset.ca/other/cs4/1992QB591.html

[6] https://indiankanoon.org/doc/106177/

[7] https://indiankanoon.org/doc/879077/

[8] https://indiankanoon.org/doc/1799476/

Does new CSR Rules suggest activities in “normal course of business” to be covered under CSR?

– Amendment leads to ambiguity

By Megha Saraf

Manager | Corporate Law Division

corplaw@vinodkothari.com

The world has taken the hit due to the outbreak of the COVID-19 pandemic. The research institutes over the globe have been trying day and night to develop a suitable vaccine to fight against the novel COVID-19 pandemic. Further, various companies or institutes in the country which have also shown positive results towards the development of vaccines and have claimed the success in it by end of the year 2021. Naturally, it is not only large number of human resource that is essential but also a significant proportion of money to produce results. While the intent of corporate social responsibility (CSR) is to make the profit making companies to spend a specific portion for the society, various stakeholders have raised a question on whether such expenditure on the research and development (‘R&D’) for producing vaccines or medical devices should qualify as a CSR expenditure or not? Also, whether the same shall qualify even if it is in the normal course of business of such a company?

The answer to both the questions is in affirmative after the Ministry of Corporate Affairs (“MCA”) issued two Notifications[1][2] dated 24th August, 2020, amending the Companies (Corporate Social Responsibility Policy) Rules, 2014 (‘CSR Rules’). In light of the ongoing impact of the COVID-19 pandemic, the said Notifications have brought in two amendments:

  • Bifurcation of clause (ix) under Schedule VII;
  • Changes under the CSR Rules.

The Article is a brief snapshot of the amendments.

Read more

MCA widens CSR for defence personnel

Measures for the CAPF and CMPF veterans and dependants now a part of CSR activity

Ankit Vashishth, Executive, Vinod Kothari and Company; corplaw@vinodkothari.com

Introduction

Schedule VII of the Companies Act, 2013 (‘Act’) currently includes measures taken for the armed forces veterans, war widows and their dependants as one of the CSR activities. The Ministry of Corporate Affairs (“MCA”) vide its Notification[1] dated 23rd June, 2020 has included contribution made towards the benefit of Central Armed Police Forces (CAPF) and Central Para Military Forces (CPMF) veterans and their dependents including widows, within the ambit of CSR.

MCA has issued several notifications either to clarify or broaden the ambit of Schedule VII. This Notification is yet another step taken by the MCA for widening the scope of CSR activities to include CAPF and CMPF veterans and their dependants and war widows.

This note tries to provide a quick coverage on the said amendment.

Difference between Armed Forces and CAPF/CPMF

Armed Forces CAPF CPMF
The term “armed forces” basically means – Indian Armed Forces which are the military forces of the Republic of India. It comprises three professional uniformed services :

1.   The Indian Army

2.   The Indian Navy

3.   The Indian Air Force

CAPF (Central Armed Police Force)[2]  consists of :

1.         Assam Rifles (AR);

2.         Border Security Force (BSF);

3.         Central Industrial Security    Force (CISF);

4.         Central Reserve Police Force (CRPF);

5.         Indo Tibetan Border Police (ITBP);

6.         National Security Guard (NSG); and

7.       Sashastra Seema Bal (SSB)

The nomenclature CAPF will be used uniformly for CPMF as per the Office Memorandum [3]issued by the Ministry of Home Affairs issued on March 18, 2011

Current CSR spending pattern and changes expected due to the amendment

The current pattern for CSR spending for armed forces veterans, war widows and their dependants include contributions to several funds like:

  1. Armed Forces Flag Day Fund (AFFDF)[4]
  2. Army Wives Welfare Association (AWWA)[5]
  3. The Army Welfare Fund Battle Casualties[6]

Apart from donating to these funds, companies have also provided financial relief to the martyr’s families and have conducted workshops for the children of war widows as a part of their CSR projects.

Further, in addition to the above, contribution to “National Defence Fund” which is used for the welfare of the members of the Armed Forces (including Para Military Forces) should be eligible for being a CSR activity.

As a result of the enhanced scope for CSR spending for CAPF/ CAMF, contribution to the fund “Bharat Ke Veer Corpus Fund”[7], which was previously not eligible for CSR considering the fact that it specifically benefits CAPF, will now be covered as per the amendment. Accordingly, any contribution to this fund will now qualify as a CSR activity.

High Level Committee on CSR

MCA had constituted[8] a High Level Committee (HLC) on CSR in February, 2015 under the Chairmanship of Secretary (Corporate Affairs) to review the existing CSR framework and formulate a coherent policy on CSR and further make recommendations on strengthening the CSR ecosystem, including monitoring implementation and evaluation of outcomes. Later, the HLC on CSR was re-constituted[9] in November, 2018. The scope of HLC was widened to include recommendation of guidelines for enforcement of CSR provisions. Though the Report discussed on amending Schedule VII in line with promoting sports, senior citizens’ welfare, welfare of differently abled persons, disaster management, and heritage, however, it did not consider widening the clause relating to the scope of armed forces in the Schedule.

Further, as evident from the data given in the HLC Committee Report[10], CSR expenditure made on armed force veterans, war widows/ dependents have seen an upward trend over the years, however it forms a very small proportion of the total CSR expenditure made.

Concluding Remarks

The service spirit of CAPF is no less than that of the Indian Army. Acknowledging this fact MCA has brought this amendment. While all the areas for CSR are extremely important for the overall socio-economic welfare and development, the measures taken for the benefit of veterans and dependants of the armed forces and CAPF/ CPMF is an extremely noble activity.

Link to our other articles:

CSR: A ‘Corporate Social Responsibility’ or a ‘Corporate Social Compulsion’?

http://vinodkothari.com/2019/08/csr-a-corporate-social-responsibility-or-a-corporate-social-compulsion/

Proposed changes in CSR Rules

http://vinodkothari.com/2020/03/proposed-changes-in-csr-rules/

FAQs on Corporate Social Responsibility

http://vinodkothari.com/2019/11/faqs-on-corporate-social-responsibility/

Read our other articles on Corplaw : http://vinodkothari.com/category/corporate-laws/

Link to our Youtube Channel : https://www.youtube.com/channel/UCgzB-ZviIMcuA_1uv6jATbg

 

[1] http://egazette.nic.in/WriteReadData/2020/220133.pdf

[2] https://www.mha.gov.in/about-us/central-armed-police-forces

[3] Office Memorandum can be viewed here

[4] http://ksb.gov.in/armed-forces-flag-day-fund.htm

[5] https://awwa.org.in/contribution-under-csr-awwa

[6] The Army Welfare Fund Battle Causalities

[7] https://www.bharatkeveer.gov.in/about

[8] https://www.mca.gov.in/Ministry/pdf/General_Circular_01_2015.pdf

[9] https://www.mca.gov.in/Ministry/pdf/OfficeOrderCommitteeOnCorporate_26112018.pdf

[10] https://www.mca.gov.in/Ministry/pdf/CSRHLC_13092019.pdf

 

 

Convening of AGM during COVID-19 crisis

-Will VC mode motivate the companies to call the AGM early?

Bunny Sehgal, corplaw@vinodkothari.com

Background

In view of the COVID-19 outbreak, the Ministry of Corporate Affairs (‘MCA’) had come up with the circular dated April 08, 2020[1] providing certain relaxations from the provisions of Companies Act, 2013 (‘Act’) and rules made thereunder including conducting the extra-ordinary general meeting (‘EGM’ or ‘Meeting’) for passing the resolutions of urgent nature through video conferencing (‘VC’) and other audio visual means (‘OAVM’) till June 30, 2020. Further, in order to provide more clarity on the modalities to be followed by the companies for conducting EGM viz. manner of issuance of notice, voting by show of hands and postal ballot etc., another circular dated April 13, 2020[2] (Collectively referred to as ‘EGM Circulars’) was brought in force. In continuation to the aforesaid circulars and in view of the social distancing norms and other restrictions thereof, MCA provided an extension of 3 months for holding annual general meeting (‘AGM’) for the companies having the calendar year as the financial year vide its circular dated April 21, 2020[3].

Now, considering the representations of various stakeholders, MCA has issued a circular dated May 05, 2020 [4](‘AGM Circular’) in line with the relaxations provided under the EGM Circulars to hold AGMs through VC/ OAVM.

While the AGM Circular will draw its reference from the EGM Circulars in terms of the modalities, however, there are various issues worth discussing to understand the scope, impact and applicability for companies to call AGM during the COVID-19 crisis. This write-up focuses on some of the issues and also provides the comparison between both the EGM Circulars and AGM Circular.

Scope and applicability

The AGM Circular applies to all the AGMs to be called by companies within the calendar year 2020. Generally speaking all the companies will call their AGM for the financial year 2019-2020 in the calendar year 2020 only. Therefore, one may conclude that this AGM Circular can be availed by all the companies without any exception. Having said that, it is also pertinent to mention that a specific condition has been laid down for companies which are not mandated to provide e-voting facility, to call their AGMs under this AGM Circular.

Para B (I) of the AGM circular provides that such companies can conduct their AGM through VC or OAVM only if the company has in its record, the email-ids of at least half of its total number of members, who –

  • in case of a Nidhi, hold shares of more than one thousand rupees in face value or more than one per cent. of the total paid-up share capital, whichever is less;

 

  • in case of other companies having share capital, who represent not less than seventy-five per cent. of such part of the paid-up share capital of the company as gives a right to vote at the meeting;

 

  • in case of companies not having share capital, who have the right to exercise not less than seventy-five per cent. of the total voting power exercisable at the meeting

While the AGM Circular provides three classes of companies, most of the companies fall under the second class where two types of majority has been mentioned. The following flow chart represents the manner in which such classes of companies, as a pre-requisite will need to have the email-ids registered with themselves:

Further, while this AGM Circular is applicable on companies, other entities like public sector banks will not be covered under this circular. Seemingly, SEBI will have to provide some sort of similar relaxation to such entities.

Furthermore, while the AGM circular comes with the time frame to avail the AGM Circular within the calendar year 2020, however, considering the fact that there would be movement restrictions even after the lockdown is lifted, therefore, this added feature, seems to be of a permanent nature for the times to come under Indian legislation. Also, many countries like US and UK already allow this facility and other countries like Hong Kong, Austria, Belgium, Germany and Italy, etc. have started giving this facility post the outbreak of COVID-19.

Motivation to conduct AGM through VC/ OAVM

After the enforcement of the AGM Circular, the companies will be motivated to convene the AGM through VC/OAVM mode. The reasons for such a motivations are many, some of them are as follows:

  1. Less time consuming process;
  2. Operating convenience;
  3. Cost effectiveness;
  4. Environment friendly;
  5. Sooner getting the advantage of last audited accounts;

While there are many reasons to conduct the AGM through VC/OAVM mode, the only difficulty seems to be is the completion and audit of the annual accounts. Once the audit is done, the companies may proceed for convening the AGM through this mode.

Will Companies want to convene their AGM early?

This question in our view, should be in affirmative for various reasons as given below:

  • Saving in cost
  • Various provisions under the CA, 2013 and various other laws (especially which are applicable to NBFCs) provide exemptions or benefits to the companies based on the net worth or assets size as per the last audited financial statements. Some them include:
    • NBFCs having asset size is of ₹ 500 cr or more as per last audited balance sheet are considered as systemically important NBFCs;
    • Applicability of CSR provisions under section 135 of the CA, 2013;
    • Appointment of independent and woman director under section 149 of the CA, 2013;
    • Constitution of audit committee under section 177 of the CA, 2013;
    • Applicability of secretarial audit under section 204.
  • Early AGM would mean early declaration of dividend and therefore a step towards shareholder service.
  • The restrictions on gathering may still continue after lifting of the lock-down.

AGM Circular to cover both ‘Ordinary Business’ and ‘Special Business’

Para A(II) and B(IV) of the AGM Circular provides the type of business which will be transacted in the AGM through VC/OAVM. The text of the same is provided below:

“In such meetings, other than ordinary business, only those items of special business, which are considered to be unavoidable by the Board, may be transacted.”

While on the first reading of the para it seems that the AGM Circular will allow to convene the AGM by VC/OAVM only for the unavoidable special business. However, that should not be the intent of the lawmakers as an AGM without the ordinary business will have to be adjourned till such time the ‘Ordinary Business’ items are decided and concluded. Therefore, aforesaid para should be construed and interpreted in a manner to include the unavoidable special business along with the ordinary business items. Accordingly, in the light of aforesaid circular, the company may proceed with to pass the ordinary as well as unavoidable special business in their AGM.

Further, for items requiring right of representation like removal of auditors or directors, etc. cannot be conducted through VC/OAVM as mentioned under EGM Circular.

Meaning of the term ‘Unavoidable’

Both the AGM as well as the EGM Circulars use the term ‘unavoidable’ business matters. The term ‘unavoidable’ means something which cannot be deferred and should not be deferred. If a company is calling and conducting its AGM, there is no reason for the company to unnecessarily defer any item of business and call a separate meeting to deal with them. Therefore, no company would ideally call a separate meeting to decide on matters just because they were not requiring immediate action during the said year. Accordingly, based on the reason of exigency or business urgency, etc., the Board of the company has to decide on the matters which are unavoidable.

Comparison of the Circulars

A meeting of the shareholders’ which is required to be convened by the companies on an annual basis, on account of a statutory requirement is called as AGM. Whereas an EGM is required to be convened by a company when the approval of the shareholders’ is required on urgent matters. The AGM Circular provides that the framework and manner of issuing notices provided in the EGM Circulars shall be applicable mutatis mutandis for conducting the AGM. While both the meetings are of the shareholders only, however called and conducted with different mindset altogether. Accordingly, it is imperative to see the implications of the provisions of EGM Circulars on the AGM. A brief comparison of both circulars is provided below:

Sr. No. Heading Provisions under the EGM Circulars Provisions under AGM Circular
1.       Type of business Only the unavoidable business shall be transacted at the EGM (excluding ordinary business items and matters requiring right of representation). Only the unavoidable business in addition ordinary business shall be transacted at the AGM as discussed above.
2. Notice of the Meeting The notice of the Meeting may be given only through email registered with the company/depository participant/depository. The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
 

For companies which are required to provide the e-voting facility

 

3. Content of the public notice under rule 20  of the Companies (Management and Administration) Rules, 2014 The following contents shall form part of the public notice for e-voting:

i.          a statement that the EGM shall be convened through VC or OAVM;

ii.          date and time of the EGM;

iii.          availability of notice on the website of the company and stock exchange, if required;

iv.          the manner in which the following can cast their votes:

a.      physical shareholders;  and

b.     who have not registered their email addresses with the company;

v.          the manner in which the persons can get their email addresses registered;

vi.          any other detail considered necessary by the company

 

The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
1. Maintenance of recorded transcript The recorded transcript shall be maintained by the company. In case of public company, the recorded transcript shall also be made available on the website of the company. The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
2. Minimum standards of VC/OVAM facility Ensure that the Meeting through VC/OAVM facility allows two way teleconferencing for the ease of participation of the members. The VC/OVAM facility must have a capacity to allow at least 1000 members to participate on first come first serve basis.

 

The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
3. Time frame for VC/OVAM facility The VC/OVAM facility shall be kept open at least 15 minutes before the scheduled time of the EGM and shall not be closed till the expiry of 15 minutes after the conclusion of the scheduled time for EGM. The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
4. Attendance through VC/OVAM Attendance of members through VC/OAVM shall be counted for quorum under section 103 of the Act. The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
5. Voting by the members present in the Meeting The members who are present in the EGM through VC/OAVM facility and have not casted their vote through remote e-voting shall be allowed to vote through e-voting system. The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
6. Election of chairman Unless the articles require any specific person to be appointed as a Chairman for the Meeting, the Chairman for the Meeting shall be appointed in the following manner:

i.          where there are less than 50 members present at the Meeting, the Chairman shall be appointed in accordance with section 104;

ii.          in all other cases, the Chairman shall be appointed by a poll conducted through the e-voting system during the Meeting.

 

The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
7. E-voting facility during the Meeting The Chairman shall ensure that the facility of e-voting system is available for voting during the Meeting held through VC/OAVM.

 

The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
8. Voting by the authorized representatives The representatives of the members may be appointed for the purpose of voting through remote e-voting or for participation and voting in the Meeting held through VC/OAVM. The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
9. Role of Scrutinizer The company should be required appoint a scrutinizer in accordance with the applicable provisions of the CA, 2013 red with allied rules for enabling transparent voting free from any conflict of interest. Same as for EGM.
10. Attendance of independent director and the auditor At least one independent director (if is required to appointed), and the auditor or his authorized representative, shall attend such Meeting through VC/ OAVM. The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
11. Notice issued prior to the EGM Circulars In case a notice for Meeting has been served prior to the date of the EGM Circulars, the framework proposed in this Circular may be adopted for the Meeting, in case the consent from members has been obtained in accordance with section 101(1) of the Act, and a fresh notice of shorter duration with due disclosures in consonance with this Circular is issued consequently. For companies which have already sent their notices for calling AGM, should be required to send out fresh notices containing the fact that meeting will conducted through VC/OAVM in terms of the AGM Circular.

 

In our view, the length of AGM notices can remain 21 days unless the same is called at a shorter notice.

12. Filing of resolutions All resolutions, passed in accordance with this mechanism shall be filed with the ROC within 60 days of the Meeting, clearly indicating therein that the mechanism provided herein along with other provisions of the Act and rules were duly complied with during such Meeting. The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
 

For companies which are not required to provide the e-voting facility

 

1. Intimation to the members w.r.t the Meeting The company shall contact all the members whose e-mail addresses are not registered with the company over telephone/any other mode, before sending notice to all the members;

 

The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
2. Content of the public notice Where the contact details of any of the members are not available with the company, it shall issue of public notice in vernacular language and vernacular newspaper in which the registered office is situated, & in English language and English newspaper having wide circulation in that district and electronic editions.

 

The following content shall form part of the public notice:

i.          a statement that the EGM shall be convened through VC or OAVM; and the company proposes to send the notice by email  at least 3 days from the date of publication of the public notice;

ii.          the details of the email address along with the phone number on which the members may contact for getting their e-mail addresses registered for participation and voting in the Meeting

 

The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
3. Maintenance of recorded transcript The recorded transcript shall be maintained by the company. In case of public company, the recorded transcript shall also be made available on the website of the company. The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
4. Minimum standards of VC/OVAM facility Ensure that the Meeting through VC/OAVM facility allows two way teleconferencing for the ease of participation of the members. The VC/OVAM facility must have a capacity to allow at least 500 members or members equal to total number of members, whichever is lower to participate on first come first serve basis.

 

The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
5. Timeframe for VC/OVAM facility The VC/OVAM facility shall be kept open at least 15 minutes before the scheduled time of the EGM and shall not be closed till the expiry of 15 minutes after the conclusion of the EGM. The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
6. Attendance through VC/OVAM Attendance of members through VC/OAVM shall be counted for quorum under section 103 of the Act. The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
7. Designated e-mail address for voting. The company shall provide a designated e-mail address to all members at the time of sending the notice of Meeting so that the members can convey their vote, when a poll is required to be taken during the Meeting on any resolution, at such designated email address. The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
8. Voting through registered e-mail only During the Meeting held through VC/OVAM facility, where a poll on any item is required, the members shall cast their vote on the resolutions only by sending their email addresses which are registered with the company. The said emails shall only be sent to the designated email address circulated by the company in advance. The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
9. Election of chairman Unless the articles require any specific person to be appointed as a Chairman for the meeting, the Chairman for the Meeting shall be appointed in the following manner:

iii.          where there are less than 50 members present at the Meeting, the Chairman shall be appointed in accordance with section 104;

iv.          in all other cases, the Chairman shall be appointed by a poll conducted through the registered e-mail during the Meeting.

 

The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
10. Voting by the authorized representatives The representatives of the members may be appointed for the purpose of voting through registered e-mail or for participation and voting in the Meeting held through VC/OAVM. The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
11. Attendance of independent director and the auditor At least one independent director (if is required to appointed), and the auditor or his authorized representative, shall attend such Meeting through VC/ OAVM. The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
12. Role of Scrutinizer The company may appoint a scrutinizer even though on a voluntary basis for enabling transparent voting free from any conflict of interest. Same as for EGM.
13. Declaration of voting results In case the counting of votes requires time, the said meeting may be adjourned and called later to declare the result. The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
14. Notice issued prior to the EGM Circulars In case a notice for Meeting has been served prior to the date of the EGM Circulars, the framework proposed in this Circular may be adopted for the Meeting, in case the consent from members has been obtained in accordance with section 101(1) of the Act, and a fresh notice of shorter duration with due disclosures in consonance with this Circular is issued consequently. For companies which have already sent their notices for calling AGM, should be required to send out fresh notices containing the fact that meeting will conducted through VC/OAVM in terms of the AGM Circular.

 

In our view, the length of AGM notices can remain 21 days unless the same is called at a shorter notice.

15. Filing of resolutions All resolutions, passed in accordance with this mechanism shall be filed with the ROC within 60 days of the Meeting, clearly indicating therein that the mechanism provided herein along with other provisions of the Act and rules were duly complied with during such Meeting. The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.

Additional requirements to be complied with by the companies which are required to provide the e-voting facility:

  • Publication of a notice by way of newspaper advertisement before sending the notices and copies of the financial statements, etc., and specifying in the advertisement the following information.
    1. a statement that the AGM shall be convened through VC or OAVM;
    2. date and time of the AGM;
    3. availability of notice on the website of the company and stock exchange, if required;
    4. the manner in which the shareholders holding shares in physical mode, or who have not registered their email addresses with the company can cast their vote through remote e-voting or through the e-voting system during the meeting;
    5. the manner in which the persons can get their email addresses registered;
    6. the manner in which the members can give their mandate for receiving dividends directly in their bank accounts through the Electronic Clearing Service (ECS) or any other means;
    7. any other detail considered necessary by the company
  • Circulation of the board’s report, financial statements and other documents through e-mail instead of physical copies;
  • Where the company is unable to pay the dividend to any shareholder by the electronic mode, due to non-availability of the details of the bank account, the company shall upon normalization of the postal services, dispatch the dividend warrant/cheque to such shareholder by post;
  • Where the company has been permitted to conduct its AGM at its registered office, or at any other place as provided under section 96 of the Act, the company may in addition to holding such meeting with physical presence of some members, also provide the facility of VC or OAVM, to allow other members of the company to participate in such meeting.
  • The companies shall ensure that all other compliances associated with the provisions relating to general meetings viz making of disclosures, inspection of related documents/registers by members, or authorizations for voting by bodies corporate, etc as provided in the Act and the articles of association of the company are made through electronic mode.

Additional requirements to be complied with by the companies which are not required to provide the e-voting facility:

  • AGM may be conducted through the VC/OAVM facility only if the company which has the email addresses of at least half of its total number of members, in its records, and
    1. in case of a Nidhi, hold shares of more than 1000 rupees in face value or more than 1% of the total paid-up share capital, whichever is less;
    2. in case of other companies having share capital, hold at least 75% the paid-up share capital;
    3. in case of companies not having share capital, who have the right to exercise not less than 75% of the total voting power exercisable at the meeting.
  • The company shall take all necessary steps to register the email addresses of all persons who have not registered their email addresses with the company.
  • The board’s report, financial statements and other documents will be circulated through e-mail instead of physical copies;
  • The companies shall make adequate provisions for allowing the members to give their mandate for receiving dividends directly in their bank accounts through the Electronic Clearing Service (ECS) or any other means.
  • The company shall upon normalization of the postal services, dispatch the dividend warrant/cheque by post to the shareholders, whose bank accounts are not available.
  • The companies shall ensure that all other compliances associated with the provisions relating to general meetings viz making of disclosures, inspection of related documents/registers by members, or authorizations for voting by bodies corporate, etc as provided in the Act and the articles of association of the company are made through electronic mode.

Application for extension of AGM for certain companies

The companies which do not have calendar year as their financial year and are unable to conduct their AGM in accordance with the framework provided in AGM Circular may apply for the application for extension of AGM before the concerned Registrar of Companies under section 96 the Act.

Conclusion

Many companies which have already approved their AGM notices will have to make suitable changes therein in line with the said circular. Further, post the issue of this AGM Circular, most of the companies will be making their debut in conducting the AGM through VC/ OAVM and it will be interesting to see smooth convening amidst the crisis.

[1] http://mca.gov.in/Ministry/pdf/Circular14_08042020.pdf

[2]  http://www.mca.gov.in/Ministry/pdf/Circular17_13042020.pdf

[3] http://www.mca.gov.in/Ministry/pdf/Circular18_21042020.pdf

[4] http://www.mca.gov.in/Ministry/pdf/Circular20_05052020.pdf

http://vinodkothari.com/2020/04/conducting-general-meetings-through-vc-during-lockdown/

Link to similar articles:

  1. FAQ on conducting AGM through video conferencing
  2. General Meeting by Video Conferencing – recognising the inevitable  
  3. FAQ on general meeting through VC
  4. Can companies offer VC facility 

More articles related to corporate laws available here: http://vinodkothari.com/category/corporate-laws/

MCA extends timeline for companies following calendar year

– by Megha Saraf

megha@vinodkothari.com

Updated as on 24th April, 2020

While currently the world is suffering due to the pandemic COVID-19, our regulatory authorities have been continuously providing reliefs/ relaxations to all corporate houses from making various compliances required under the statutory laws. While some of the major relaxations such as conducting extraordinary general meeting of shareholders through VC, making contribution to PM-CARES Fund as a notified CSR expenditure or making compliances under Listing Regulations have already been notified, MCA has come up with yet another Circular[1] granting relaxation from holding AGMs to such companies that follows calendar year as their financial year.

Can there be a different financial year apart from April-March?

Section 2(41) of the Companies Act, 2013 (“Act, 2013”) lays down the definition of “financial year” as, “in relation to any company or body corporate, means the period ending on the 31st day of March every year, and where it has been incorporated on or after the 1st day of January of a year, the period ending on the 31st day of March of the following year, in respect whereof financial statement of the company or body corporate is made up:

Provided that where a company or body corporate, which is a holding company or a subsidiary or associate company of a company incorporated outside India and is required to follow a different financial year for consolidation of its accounts outside India, the Central Government may, on an application made by that company or body corporate in such form and manner as may be prescribed, allow any period as its financial year, whether or not that period is a year:”

XX

There are corporate groups where the structure of shareholding is such, that the holding company is situated outside India and is having Indian subsidiaries. The provisions of law provide that where the relationship between the group is such, that it requires the Indian company to follow a different financial year for the purpose of consolidation of its accounts with the accounts of the company situated outside India, such Indian company can have a different financial year. However, such company needs to apply to the Tribunal for the same.

What is the timeline for holding AGMs?

Section 96 of the Act, 2013 provides that a company is required to hold an AGM within 6 months from the date of closing of the financial year. However, a newly incorporated company can have its first AGM within 9 months of the closure of the financial year.

Are there such companies following a different financial year?

Source[2]: Business Standard: 226 firms to march to a new accounting year

Yes. As per the above graph, there are nearly 226 companies in India that follow a different financial year. Out of the 226 companies, 74 are such companies whose calendar year is the financial year i.e. January- December.

What is the relaxation?

Currently, only companies that follows calendar year as financial year have been granted a 3-months relaxation from holding their AGMs i.e. such companies are allowed to hold their AGMs till 30th September, 2020 instead of June, 2020. Further, the due dates of all other related compliances such as filing of annual returns or financial statements which are required to be done within 60 days/ 30 days as applicable shall be construed accordingly.

What if the company is a listed entity?

Regulation 44(5) of the SEBI (LODR) Regulations, 2015 provides that where the listed entity is within top 100 listed entities based on market capitalization, they have to hold their AGM within 5 months from the closure of the financial year i.e. by August 31, 2020. However, considering the present situation and the need for social distancing, conducting AGMs within such time was becoming a challenge for large corporates. Keeping this in mind, SEBI has granted relief to such entities by extending the requirement by 1 month i.e. till September 30, 2020. However, there was no clarity on what if such entity is a listed entity and follows calendar year as their financial year and is among the top 100 listed entities.

SEBI has now also clarified the same vide its Circular[3] dated 23rd April, 2020 and the present timeline may be summarized as follows:

Sl. No. Type of company Time line under the Companies Act, 2013 Time line under the  SEBI (LODR) Regulations, 2015 Extended timeline
1 Listed company following Apr- Mar as F.Y. Within 6 months from end of FY i.e. 30th September, 2020 Does not provide No extension
2 Listed company following Jan-Dec as F.Y. Within 6 months from end of FY i.e. till 30th June, 2020 Does not provide Extended by 3 months i.e. till 30th September, 2020
3 Listed company following Apr- Mar as F.Y. and amongst top 100 listed entities General provision- Within 6 months from end of FY i.e. 30th September, 2020 Within 5 months from end of FY i.e. till 31st August, 2020 Extended by 1 month i.e. till 30th September, 2020
4 Listed company following Jan- Dec as F.Y. and amongst top 100 listed entities General provision- Within 6 months from end of FY i.e. 30th September, 2020 Within 5 months from end of FY i.e. till 31st May, 2020 Extended till 30th September, 2020 under both laws

 

Therefore, all types of companies can conduct their AGMs till 30th September, 2020.

Our other articles on related subject may be found here.

[1] http://www.mca.gov.in/Ministry/pdf/Circular18_21042020.pdf

[2] https://www.business-standard.com/article/companies/226-firms-to-march-to-a-new-accounting-year-113100300666_1.html

[3] https://www.sebi.gov.in/legal/circulars/apr-2020/relaxation-in-relation-to-regulation-44-5-of-the-sebi-listing-obligations-and-disclosure-requirements-regulations-2015-lodr-on-holding-of-annual-general-meeting-agm-by-top-100-listed-entitie-_46552.html