MCA U-TURN ON CORPORATE GOVERNANCE

Recently Ministry of Corporate Affairs (“MCA”) issued notification dated 6^th January 2020 to amend the rule 8A of Companies (Appointment and Remuneration of Managerial Personnel) Rule, 2014 which changed the Criteria to appoint Company Secretary (“CS”) in private limited companies and Public Limited Companies. The amended rule 8A is as follows:

8A. Appointment of Company secretary in Companies Not covered under Rule 8

Every private company which has a paid-up share capital of ten crore rupees or more shall have a whole-time company secretary.

Earlier this limit of ten crores was five crores. The way MCA amended the rule it seems that MCA did not consider the other criteria to appoint the CS.

Earlier raising equity share capital in a company could be the only source of getting funds, and paid-up share capital was considered as criteria to appoint CS as a whole time employee in the company. But, now the scenario is completely changed; company going for other avenues to raise funds such as Non-Convertible Debenture (“NCD”), Loan from banks, Financial Institution, Compulsorily Debenture (“CCD”), Deposits, which are more complicated instruments from compliance point of view but MCA completely ignored these criterions while considering the appointment of CS in companies whose paid-up share capital is up to 9,99,99,999.

Few industries expert said this move of MCA As ease of doing business but just imagine a situation where a company raises 100 Crore through NCD or CCD or having a turnover of Rs. 500 Crore but there is no CS in such company who can handle complex corporate compliance. When a non-compliance in a company comes in the public domain, it erodes the investor confidence on corporate structure which ultimately hit the economy. If any person who understands the role of CS can simply infer that what would be compliance and Corporate Governance situation in a company which has no CS.

If I give you an example how important is appointment of company secretary in a company, then imagine if a person is following a poor diet then initially that person hardly notice any sign of disease but everybody knows, in the long run, his body will become a room for various disease. As a result, his body gets deteriorated and at the end, the body will collapse. The same thing happen with corporates that don’t follow corporate governance norms.

Risk of not appointing CS in a company:

I am not saying that if your company does not appoint CS then immediately it incurs financial losses and collapse but I am sharing with you different perspective in this regard. If you have observed those companies which don’t appoint company secretary, you will find that these companies don’t maintain the minutes of board and its committee meetings, non-compliance of filing of ROC forms, no system, etc. These things may not bother the promoter initially but these companies always feel hesitate when they plan to scale up their business, planning to go for IPO, merger, amalgamation because at that time detailed scrutiny of such companies past record may unearth many non-compliances which shall attract regulatory actions and that will cost a company a lot besides reputational risk. Sometimes a simple non-compliance may put the company in a weaker position while negotiating corporate restructuring, Acquisition deal.

If you think I am exaggerating a situation then you may recall a case of director disqualification when MCA disqualified around 2 lakh directors because those companies in which such directors were on the Board of such Companies, had not filed their financial statement and Annual Return with MCA. This could be a lesson how not intimating MCA a small corporate action may lead to disastrous consequences for directors.

What do you think Chartered Accountants (“CA”) who advise such companies, don’t know such compliances? They do! But they hardly bother for such filings. They simply bother about their Audit Fees and nothing more. I am highlighting these points because most of experts know such compliances but knowing the law is not enough, there has to be a professional in the company who can IMPLEMENT such provision.

In current scenario, unfortunately, corporate governance level in Indian corporates is at very nascent stage. Instead of fostering the governance norms in small companies by mandatory appointment of CS, MCA increased the limit of paid-up capital for CS appointment who can manage the compliances of a company in effective way.

Indian Corporate still has Lala mentality and weighs everything in terms of money and considers the appointment of professional as a financial burden. Indian entrepreneurs generally do not take compliance seriously just like a rider on two-wheeler vehicles don’t bother to wear a helmet though this rule is made for their safety but still government has to tell time and again to wear a helmet. In the same way, MCA should have made CS appointment mandatory in a company with certain exceptions to the small companies (as defined under the companies act, 2013).

We all read on daily basis in a newspaper that Non-performing Asset (“NPA”) is increasing in India day by day or companies which are defaulting in making payments, are being dragged to NCLT for resolution or liquidation. If you notice condition of such companies then you will find one common thing that there are fraudulent transactions which were being done in the past. A fraudulent transaction may include siphoning of funds to their subsidiaries/known entities, selling of asset to their related parties and so on. Surprisingly, such companies are subject to mandatory audit by Chartered Accountant, still such frauds remain undisclosed. Reasons could be many but the prime reason of such corporate default is not following Corporate Governance norms in true letter and spirit.

At last, I would say corporates continue to fail if they follow laws on a piece of paper only. MCA must encourage the corporates to have CS on a whole-time basis which can guide the board on best corporate governance practices and foster the governance culture in such corporates.