Secretarial Standard-1(SS-1)-relating to Board and Committee Meetings: A critical Analysis

Introduction

Section 205 of the companies Act,2013, (herein after referred to as “The Act’)inter alia, enjoins upon the Company Secretary to  ensure that the company complies with the applicable Secretarial Standards. The Explanation under the above Section defines ”Secretarial Standards” as standards issued by the Institute of Company Secretaries of India(ICSI)  and  approved by the Central Government. Pursuant to the above, the ICSI has rolled out two standards, one relating to conduct of Meetings of the Board (SS-1) and the other on holding General Meetings (SS-2) both of which have been notified by the Government on April 23, 2015. Both the above Standards will become applicable mandatorily effective from July 1, 2015 in respect of Meetings held or after July1, 2015.

In this discussion, we will analyse critically the prescription contained in SS-1, the additional responsibilities that will have to be shouldered by the Company Secretary in consequence thereof   and also point out the specific areas where we feel the Standard is inconsistent with the provisions of the Act and hence   legally unsustainable.

Scope

The standard applies to all types of companies except one person companies (OPCs). Given the fact that the adherence to the principles enunciated in the standard, as we will discover is an arduous exercise, one is not sure whether marginal companies which are merely legal extensions of the partnership form of business should be subjected to the rigours of the standard.  Such companies may not have the resources to measure up to the exacting levels of the expected compliances. Our submission is that the applicability of the standard should have been restricted to only those companies which have a reasonable paid up capital threshold of say Rupees five crores or above which would be suggestive of their ability to garner resources to meet the lofty expectations of SS-1.

Authority to convene a meeting

Para 1.1.1 provides that any director of the company may, at any time, summon a meeting of the Board and the company Secretary or where there is none, any person authorized by the Board shall convene the Meeting in consultation with the chairman or in his absence, the Managing Director or Whole time Director ,unless otherwise provided by the Articles.

It follows from the above that it will be necessary for the Board to pass a resolution authorizing certain persons other than the company Secretary or the Directors to convene its meetings.

The chairman is empowered by the standard to adjourn the meeting for any reason at any stage of the meeting unless such adjournment is objected to by the majority of the directors present at the Meeting at which the quorum is available. The question that comes up is as to who would have the authority to adjourn the meeting if the Board does not have a designated chairman. Our view on this is that in such an eventuality, the director chairing the proceedings should have the authority to adjourn the Meeting, notwithstanding that he may not be the chairman of the adjourned meeting.

Time and place of meeting (Para 1.2)

This para contemplates that every meeting shall a serial number.  It falls short of describing how this serial number should be assigned.  Our take on this is that it is not expected that such numbering should follow any chronological order. Such an expectation would be unrealistic, particularly for companies which have been in existence for a long time. We feel that considering that the standard kicks in from the middle of this year, one can assign for meetings convened on or after July 1,2015 a serial number say”1/2015”and proceed on this basis for each year according to the Gregorian calendar.

The standard does not permit the holding of a meeting on a national holiday.  The Act does not expressly prohibit the Board from holding a meeting or an adjourned meeting on a national holiday. That being so, the standard transgresses the Act and from this perspective is legally unsustainable. The embargo on holding the original meeting on a national holiday seems appropriate. The restriction should not have been extended to an adjourned meeting considering that the Board may have, in an emergency, the need for holding the adjourned meeting to transact the adjourned business even on a national holiday.

Facility of attending the meeting through video conferencing (Para 1.2.3)

The Act and the Rules thereunder permit Directors to attend meetings of the Board through video conferencing if such facility is provided by the company. Rule 4 of the companies (Meetings of Board and its Powers) Rules 2014 places a restriction on the transaction of certain items of business such as the approval of the annual financial statements, Directors’ Report etc through participation of Directors through video conferencing. The standard also imposes a similar restriction over transacting such items. However, the standard   expressly permits the Chairman to transact such restricted items   through video conferencing. In our view, when neither the Rules nor the Act contemplate the provision of such authority to the chairman, the standard cannot logically bestow such   authorization.  This is again another instance of the standard encroaching on the Statute thus making itself unsustainable.

Another aspect in the relevant para which is a cause for consternation is the fact that where it comes to listed companies, the adoption of financial statements by the Board and the recommendation thereof by the Audit Committee for interim periods such as at the end of every quarter in line with the requirements of Clause 41 of the listing agreement   validated even with the participation of directors through video conferencing. This posture in the Standard is in line with the notification dated August 14, 2014 issued by the MCA by which amendments have been introduced to the companies (Meetings of Board and its powers) 2014 which has the effect of permitting the adoption of financial statements for interim periods by the Board at meetings at which Directors are present through video conferencing. In our view, the legality of the above notification is not beyond doubt, given the fact that the definition of “financial statements “ in Section 2(40) of the Act is inclusive and can also therefore legitimately encompass financial  statements drawn up for interim periods. It is a settled principle of law as propounded   by the Supreme Court in State of Bombay Vs. Hospital Mazdoor Sabha (AIR 1960SC 610 at page 614) that where we are dealing with an inclusive definition, it would be inappropriate to put a restrictive interpretation upon terms of wider denotation.

Assuming but not admitting that the notification referred to above is legally tenable, it is submitted that the significance of interim financial statements for listed companies is no less than that of the statements for the financial year as a whole.  If anything the Stock Market waits,  in many cases, with great anticipation for the Quarterly numbers. Nearer the time of announcement of the results for the financial year, the market tends to discount the tock ,depending upon the trend set in the preceding three quarters.   It is therefore inappropriate from the standpoint of good governance for the  standard to allow such an item to be transacted through video conferencing, given the limitations of such a facility where it comes to  enabling meaningful interaction by the Board members with the Statutory Auditors being in attendance at such meetings  as well. The standard has, therefore the undesirable consequence of relegating the significance of financial statements for interim periods.  It is humbly submitted that the standard  should restore the status quo ante  on the Meetings of the Audit Committee for consideration of Accounts that existed in Rule 4 of the companies (Meetings of Board and its powers) Rules, 2014 before the notification referred to above was put through and effectuated.

Service of Notice (Para 1.3)

This para states that the notice for the meeting should be issued in writing and serviced either through post / by hand or through electronic means. Where the Director has prescribed a particular mode of service, the same should be followed. The Notice should also indicate whether the facility of video participation shall be allowed and if so, the Director should indicate whether he would be availing the facility in response to the notice.

The notice should also incorporate the serial number of the meeting and provide the contact details of the chairman and the company secretary to whom the director shall confirm his attendance at the meeting. This is welcome but what is irksome to note is that the chairman has been bracketed alongside the Company Secretary for this purpose.  The Chairman ought to have been kept out of the communication loop. Readers are aware that the Act itself contemplates under Section 203  the separation of the office of the chairman and the chief Executive officer. The chairman is expected to play a non-executive role and it would have been appropriate, if instead of the chairman, the Managing Director or the CEO should have been kept in the channel   along with the company Secretary, where it comes to administrative matters relating to Board management.

Para 1.2.3 provides that notices should be issued even in respect of meetings which are pre-determined dates or pre-determined intervals.  This is appropriate.

Para 1.3.6 states that the notice should be issued at least  seven days prior to the meeting.  It does not speak about the concept of “clear days”.  It is the normal convention that while determining the length of the notice period, the date of the notice and date of the meeting are excluded from consideration. Our view is that we should respect this time-tested concept. It would have been appropriate if the standard had covered this aspect. However, where it comes to service of notice through post or courier, two days are required to be added to the notice period which is perfectly in order.

Issue of Agenda for the Meeting (Para 1.3.7)

The Agenda for the Meeting with the notes thereto should also be sent out seven days prior to the Meeting. The mode of despatch of the Agenda would be similar to the Notice for the Meeting. Adherence to the preferred mode of receipt of Agenda as indicated by the director should be ensured.

The Company needs to maintain documentary evidence as to the  despatch of the Agenda.

Given the timelines for issuing the Agenda, the Standard postulates realistically that where it comes to matters which are in the nature of price sensitive information, a shorter notice can be given with the consent of the majority which should include at least one independent Director.

The standard lists out the items which are price sensitive in nature and also provides that the general consent of the Board can be obtained at the beginning of the financial year for providing the notes on such matters .Such consent shall be valid until there is any change in the Board.

Considering the above, it is advocated that once the standard kicks in, it would be advisable at the first meeting to seek the general consent of the Board for this purpose.

Where such consent has not been obtained, consent for the concerned items should be taken at the meeting itself and the Minutes should record the fact that consent has been so obtained.

Supplementary items on the Agenda

Due to exigencies of business it often becomes necessary to table at the Meeting, certain items not considered hitherto in the circulated Agenda .The standard permits the facility of including such items, albeit with the permission of the Chairman and with the consent of the majority present of which at least there should be one independent director. This is welcome,  given the reality that business should not be impeded at the altar of procedure.

Agenda Notes should be elaborate (Para 1.3.8)

Meetings of the Board are intended to transact serious business. It is therefore appropriate that the Standard should ordain that Agenda notes should be comprehensive and provide relevant facts so that the Directors have complete foreknowledge of the items which would facilitate quality decision making. Where approval has to be accorded by the Board for any item, the draft of the Resolution should also be appended with the Agenda. The interest of Directors with respect to specific items in the Agenda should also be noted in the Agenda.

Items of business which are mandatorily to be included in the Agenda due to the force of any statute or Regulation have been identified and listed out illustratively as an Annexure to the Standard.

Agenda items should be numbered serially (Para 1.3.9).

Numbering should be such as to facilitate ease of reference /cross reference.

Consideration of Items not included in the Agenda(Para 1.3.10)

This para appears to be a reiteration of what the standard contemplates in regard to transacting  supplementary items not forming part of the original Agenda. The para further postulates that the minutes with respect to adoption of such an item can be finalized only upon the ratification of the decision by an Independent Director, if none were present at the Meeting. If the company does not have an Independent director, the Minutes on the subject item can be finalized only if the majority of the directors ratify the decision unless the decision on the item is taken by the majority of Directors at the Meeting itself.

Transaction of urgent business at shorter notice.(Para 1.3.11)

The notice and agenda notes for items of urgent nature can be given at a shorter notice if at least one independent director is present at the meeting. In case no independent director was present at the meeting the decision taken in the matter shall  be final only upon ratification thereof by an Independent director. Where the company has no independent Director, the decision taken becomes actionable only upon the ratification of the decision by the majority of directors unless the decision was approved at the meeting itself by the majority of directors.

The fact that the meeting for transacting the urgent business was held at shorter notice should be duly recorded in the Minutes.

Frequency of Meetings(Para 2)

The Board shall meet at least once in a calendar quarter and the time lag between two meetings shall not exceed 120 days. The standard is in consonance with the law on this point.

In the event that the meeting is adjourned, the time lag between meetings will be reckoned with reference to the date of the original meeting, given the fact that an adjourned meeting is essentially a continuum of the original meeting.

Meetings of Committees-Frequency(Para 2.2)

As the law does not provide for any time lines for meetings of committees, the Standard correctly provides the flexibility to the Board to decide on the frequency of holding committee Meetings.

Meeting of Independent directors (Para 2.3)

The standard reiterates the need as laid down in Schedule IV of the Act as also in  the provisions of the listing agreement to hold at least one meeting of the Independent directors.

The Company Secretary is only expected to facilitate convening and holding of such meetings if the independent directors seek his support. There is no directive for the company secretary to be present at the meeting and draw up the Minutes.

The standard ought to have shed light on this, considering that Rule 10 of the companies (Appointment and Remuneration) Rules, 2014 casts a duty on the Company Secretary to attend Meetings of the Board and General Meetings as also maintain the Minutes thereof.  This Rule however runs contrary to Schedule IV to the Act which clearly provides that the Meeting of the Independent Directors shall be held without the attendance of the members of the Management.

Quorum (Para 3)

The quorum for the Meeting should be present throughout.  In matters in which the Director is interested, his presence shall not be considered for determining the quorum.  Directors participating through electronic mode shall also be counted for the purposes of quorum, except for those items of business which cannot be transacted through their presence by video conferencing. 

The quorum for the Meeting of the Board shall be atleast one third of the total strength or two Directors whichever is higher.  This is in line with the prescription in the law.

Para 3.5 postulates that for a Meeting of the Committee, the quorum shall comprise of all the members of the Committee unless otherwise stipulated under the Act or the Articles or by the Board.  The statute does not contain any provision as regards the minimum quorum for a Committee.  As it is highly improbable that all the Meetings of the Committees will be attended by all the Directors, it is advisable for the Board to determine the quorum for each of the Committees and legislate suitably.

Recording Attendance at Meetings (Para 4)

The Standard provides that attendance of those present at Meetings of the Board and Committees should be recorded in separate registers to be maintained for the purpose.  The Register should also be signed by persons other than the Directors and the Company Secretary, who may be invited for such Meetings.  The Statutory Auditors normally attend the Meetings of the Audit Committee and provide a presentation on the Quarterly and Annual Financial Results.  They are invited specifically for such Meetings and depart after making their observations on the Financial Statements.  The attendance register for recording their presence should state specifically the items in respect of which they were present at the Meeting.Other Senior persons in the corporate hierarchy such as the Chief Financial Officer(CFO) who are invited to the Meetings should sign the Register as “Invitees”.

Where Directors are present through electronic mode, the attendance register shall be deemed to have been signed by them. The Company Secretary should record their presence appropriately in the register.

Para 4.1.4 stipulates that the attendance register should be maintained at the registered office or any other place as approved by the Board.  Hence, a resolution should be passed by the Board to record the place at which the register shall be maintained .

Para 4.1.5 empowers the Directors to inspect the Register. The right of inspection shall also be available to the Auditors and to the Secretarial Auditor of the Company.  The above register shall not be subject to inspection by the members and shall be kept under the custody of the Company Secretary.

Para 4.1.7 also envisages that the register shall be maintained for atleast a period of eight financial years where after it can be destroyed with the Board’s approval.

Para 4.2 lays down that leave of absence shall be granted to a Director only when such request has been received by the Company Secretary or by the Chairman.  This suggests that the Standard pre-supposes that a formal request shall be received for leave from the Director concerned, although the law is silent on this issue.   The time tested convention is to allow leave of absence even upon receipt of a verbal request.  Given the fact that under Section 167, the Director vacates his office should he be absent from all the Meetings of the Board held during the period of twelve months either with or without seeking leave, it would now be advisable for the Company to seek a formal request for leave of absence from the concerned Director and maintain a record thereof.

Chairman (Para 5)

This para clarifies that the Chairman of the Company shall be the Chairman of the Board.  In case the Company does not have a Chairman, the Directors may elect one person amongst themselves.  The Standard also speaks about the administrative responsibilities with the Chairman for conducting Meetings.  He should, with the Company Secretary, inter alia, safeguard the integrity of Meetings and ensure identification procedures.  As stated earlier,Section 203 of the Act in a way advocates the separation of the Office of the Chairman and the Chief Executive Officer (CEO), such administrative responsibilities associated with the Meetings ought not to have been bestowed on the Chairman.  The Managing Director (MD) or the CEO should have the responsibility for such matters along with the Company Secretary.

The standard also clarifies that unless otherwise provided in the Articles, in case of equality of votes, the Chairman shall have a  second casting vote.

Passing of Resolutions by Circulation (Para 6)

The standard provides in Annexure A an illustrative list of items which shall be placed before the Board at its Meetings and shall not be passed by circulation.  Therefore, in respect of permitted matters, the Chairman shall be authorized to decide whether the approval needs to be obtained through a circulation resolution.  In the absence of the Chairman, such authority is exercisable by the MD or if there is none, by a Director other than an interested Director.

In case one third of the Board decides that the resolution should be adopted only at a Meeting, the Chairman shall in deference  to such a decision , ensure that the same is put up for consideration only a Meeting of the Board.

The circulation sheet for the Directors should be comprehensive incorporating the relevant facts, the nature of the interest of any Director and also provide the draft of the resolution.  The Standard provides that if no response has been received from the Directors within seven days from the circulation of the draft, it should be construed that the Director has abstained from voting.

Para 6.4 provides that resolutions passed by circulation shall be noted at the next Meeting of the Board and the text of the resolution should also be recorded in the Minutes in full with details of any dissent or abstention.  In case any Director was interested in the resolution passed by circulation, the Minutes should record this fact.

Maintenance and Recording of Minutes (Para 7)

Para 7.2.1.1, inter alia, provides that the Minutes should state the serial number of the Meeting.  As discussed hereinabove, in our view, there is no need for maintaining a chronological order of the Meetings since such a procedure may be impractical for Companies which have existed for many years.  The above para envisages that the time of conclusion of the Meeting should also be recorded in the Minutes.  This is a welcome requirement.

Para 7.2.2 lists out the specific contents in the Minutes. 

Para 7.3.1 gives the Chairman the absolute discretion to exclude from the Minutes, matters which in his opinion are or could reasonably be regarded as defamatory of any person, irrelevant or immaterial to the proceedings or which are detrimental to the interest of the Company.

The question that emerges is whether the Chairman should be given such discretion, given the fact that the Minutes are supposed to contain a fair and correct summary of the proceedings of the Meeting. 

Para 7.3.2 pontificates over  the manner in which the Minutes should be written.  It states that the Minutes shall be written in clear, concise and plain language.  For good measure, it also adds that the Minutes should be written in third person and in past tense and that resolutions should be in present tense.

As trained professionals, Company Secretaries are aware of the manner in which Minutes ought to be drawn up.  Therefore, it is intriguing to note that the Standard should offer lessons in grammar where it comes to the manner of recording the Minutes.

Finalisation of Minutes (Para 7.4)

The Standard postulates that the draft Minutes should be circulated to the Directors within fifteen days from the date of conclusion of the Meeting.  The Company should maintain proof of sending the draft Minutes.

Directors are expected to offer their comments within seven days from the receipt of the drafts and their communication should be in writing.  In case the Directors’ comments are received after the expiry of seven days, the Chairman shall have the discretion in deciding whether to consider the comments or not.

The Standard also provides that a Director who has ceased to be one after the conclusion of a meeting, shall also be entitled to receive the draft Minutes of the particular Meeting and can offer his comments thereon irrespective of whether he attended such meeting or not.  This is laudable.

Para 7.5 speaks about the requirement of the Minutes being entered within 30 days from the date of the Meeting. The subsequent paragraphs dwell upon the manner in which the Minutes are to be signed by the Chairman, their dating etc and are  basically a reiteration of the legal requirements on such issues and do not warrant repetition, in the interest of brevity.

We must however, state that the requirement enshrined in para 7.6.4 that a copy of the signed Minutes should be sent to all the Directors within 15 days of the Meeting ,is, to our mind, a needless procedure ,given the fact that the Minutes are finalized only after considering the views of the directors.

Extract of Minutes(Para 7.7.2)

This para provides that extracts of the Minutes should be parted with only after the Minutes have been duly entered in the Minutes book. However, certified copies of resolutions can be provided once the text of the resolution has been placed at the Meeting which is a fair procedure.

Office copies of Notices, Agenda-their preservation(Para 8.2)

This para stipulates that office copies of Notices, Agenda, and Notes thereon should be preserved in proper order either physically or electronically as long as they are current or for a period of eight years whichever is later. Their destruction after they have outlived their existence shall be only with the authorization of the Board.

Conclusion

We have tried to capture above the nuances of the standard, the additional onerous responsibilities which have to be shouldered by the Company Secretary through a very stiff regime of record keeping which the standard provides for. In many areas ,the standard echoes the sentiments in the substantive law and is bordering on over-legislation, which is not palatable. We have also identified the areas in which the standard is in conflict with the substantive law and therefore is  in danger of being considered as legally unsustainable. One major criticism which we would offer is the over emphasis on record keeping. As it is, the Company Secretary is on a veritable tight rope walk, having to contend with the welter and onslaught of the  ever increasing regulatory requirements which are very exacting and tenuous. The standard should not be dysfunctional and It should not therefore be the case of the proverbial last straw which broke the camel’s back.

Ramaswami Kalidas