Secretarial Standard-2(SS-2) relating to General Meetings - Some perspectives

Introduction

Pursuant to   the provisions of Section 118(10) of the Companies Act, 2013(hereinafter “The Act”), it is incumbent upon every company to observe secretarial standards with respect to general and Board meetings as specified by the Institute of company secretaries of India (ICSI).The above Standard along with Secretarial Standard-1 relating to Meetings of the Board and its Committees has been notified for application effective from  July  ,1,2015.

As per the  responses to the queries received on SS-2  issued by the ICSI, the Standard shall apply only in respect of  Notices for General Meetings which have been issued on or after July, 1,2015. Arising out of the above, it follows that in cases where the Notices for General Meetings were issued prior to July 1, 2015 , notwithstanding the fact that such meetings were held on or after July,1, 2015, the Standard would not apply to such meetings.

Non-compliance with the requirements of both SS-1 and SS-2 shall expose the company and its officers to penalty as contemplated by Section 118(11). Further, in case of companies which are impacted by the requirements of Secretarial Audit, it would be necessary for the Secretarial Auditor to state in his Report whether the Company has followed the Standards.

Against the above backdrop, it would now be appropriate to examine some of the issues emanating from the Standard which have generated  considerable debate in the fraternity of professionals and also to   introspect on certain areas where there   exist an element of doubt  as to the legal sustainability of the Standard. Without any further ado, let us grapple with some of the contentious aspects arising out of SS-2.

Does SS-2 apply to Private Companies?

Given the exacting requirements of compliance thrown open by SS-2, the Question that  lies upper most in the minds of most is whether the Standard applies to private companies.

We will preface this discussion by stating at the outset, that in the   original form in which the Standard was issued, only one person companies (OPCs) and  certain classes of companies which are exempted by the Central Govt through notification have been  spared the rigors  of compliance with the Standard. Subsequently through notification dated 5th June, 2015 , issued  by the MCA,  the provisions of Sections 101  to 107  and Section 109 relating to demand for poll have been made exempt for private companies. Sections 101 to 107   deal with matters relating to holding of General Meetings. Although the provisions of Section 118(10)   in terms of which both the above standards have to be embraced by every company have not been expressly made exempt for private companies vide the notification referred to above, given the fact that provisions relating to General Meetings do not apply after June 5, 2015 to private companies , it would be  fair to take a view  that SS-2  does not apply to private companies. To put an end to any controversy on this issue, it would be appropriate if an express assertion to this effect is issued by the Powers that be.

Applicability of SS-2 to a Section 8 Company

Vide Notification No.F.No.1/2/2014-CL1,dated June 5, 2015   the provisions of Section 118 have in entirety been made inapplicable to a Section 8 (Not for Profit)Companies subject to the rider that the Minutes of the Meetings of Companies belonging to the above genre may  have to be recorded within 30 days of the conclusion of every meeting where the Articles of such companies provide for confirmation of minutes by circulation.

As Section 118(10) which mandates the compliance by companies with SS-1 and SS-2 does not apply to a Section 8 Company, they are exonerated from the rigmarole of compliance on this score.

Applicability to Nidhis and Government companies

The Notifications issued by the MCA on 5th June, 2015 granting exemptions to Nidhis  and Government Companies from the application of several provisions in the Act do not contain any exemptions to such companies from the application of Section 118(10)of the Act. The standard therefore applies to such categories of companies. As per the response of the ICSI, SS-2 applies to all companies under the Act save and except those as stated above. Therefore  , where a Banking company has been incorporated under the Act, SS-2 shall apply to such a company.

Applicability of Standard to class Meetings

Lest it be assumed that the Standard applies   only   to General Meetings of   members of companies incorporated under the Act,  the introductory paragraphs of the Standard clarify  that the principles enunciated in the Standard shall apply, mutatis mutandis,to meetings of debenture holders and creditors. Any class meeting which is held under the aegis of the Court or the Company Law Board (CLB), or the National Company Law Tribunal (NCLT) or any other Authority prescribed shall also be governed by the requirements of the Standard without prejudice to any rules, directions or orders of such authorities in so far as it relates to conduct of such Meetings.

Standard confirms to the provisions of the Act

In the paragraph which describes the scope of the Standard, it has been clarified that the standard is in conformity with the provisions of the Act. However, if  due  to subsequent changes in the Act, a particular standard or part thereof becomes inconsistent with the Act, the provisions of the Act shall prevail.

It is our surmise that the an assertion on identical lines would be replicated in  the standards on other matters which will be rolled out by the ICSI and notified by the MCA over the passage  of time. Having said this, it would be appropriate to see whether the prescription contained in SS-2 is wholly consistent with the provisions of the Act. In our view, there are certain facets in the standard which travel beyond the contours of the Act and hence may not be legally sustainable if called into  question before a  judicial forum.

In this exposition we shall articulate on such issues and also dwell on certain aspects of the Standard which, pontificate, needlessly on rudimentary and basic issues.

Para 1.2.8-Notice to be in accordance with Standard

As per the above para, no business shall be transacted at a meeting if notice in accordance with this Standard has not been given. One is not sure about the legal strength behind the above assertion. Admittedly , the Notice for the General Meeting should be in accordance with the requirements of Rule 18 of the companies (Management and Administration)Rules, 2014.If the requirements of the above provisions are not fully satisfied by the Notice issued for the Meeting, the notice would obviously be contrary to the law and hence unsustainable. However, the standard contemplates certain  requirements  in respect of the Notice for a Meeting which are not mandated by the Statute. For instance para1.2.4 of the standard, inter alia, provides that the Notice for the Meeting should include a route map and prominent land mark for easy location of the venue of the Meeting. In case of companies which have a web site the route map has to be hosted along with the notice on the website. The question that can be raised  ,in the light of the above prescription, is whether in the event a Company has inadvertently omitted to provide a route map of the venue along with the Notice for the Meeting , since  the Notice is technically not entirely in accordance with the standard, can it be concluded that no business can be transacted at the Meeting. Omission to provide the route map with the Notice would be at best put down as a minor transgression. Surely it is not a dereliction  of such magnitude as to invalidate the business transacted at the Meeting.

Therefore the contents in para 1.2.8 of the standard, we would humbly submit, have to be considered with a pinch of salt.

No gifts, gift coupons  or cash in lieu of gifts to members please-Para 14

Provision of gifts, coupons, sweets to members attending a General Meeting is common place either covertly or overtly,  in the case of a lot of companies including some reputed companies which extol the virtues of governance pompously. It is a despicable practice and should not be encouraged. Correctly therefore under Para-14 distribution of gifts   , coupons or cash in lieu of gifts to members is prohibited. While this is a laudatory provision which should be followed steadfastly by all companies, one is not sure whether it   is legally sustainable in as much as there is no express provision  for such restraint in   the Statute .

Procedure to be followed for Requisitioned Meetings of Members not consistent with the Act

Para 1. Of the standard states, inter alia, that in respect of an Extra-ordinary General Meeting of the Members convened by the requisitionists  ,no explanatory statement needs to be annexed to the Notice and the requitionists themselves may disclose the reasons for the resolutions which they propose to move at the Meeting.

Para .2.4 of the Standard states that  a Meeting of the requisitionists  shall be held only on a working day .Further, a meeting called by the requisitonists  shall be held either at the registered office of the company or at some other place within the city or town in which the registered office of the  company is situated.

The above assertions are corroborated by Rule 17(2) and the Explanation there under in the Companies (Management and Administration) Rules, 2014.

It is pertinent to note that under Section 96(2) of the Act,  the restriction in so far as holding a General Meeting on a national holiday applies only to an Annual General Meeting of the Members. Besides, the embargo on holding meetings of the members at a venue outside the place of the company’s Registered  office applies only to the annual General Meeting as contemplated by Section 96(2).

The Act does not expressly prohibit the holding of a General Meeting other than an AGM on a national holiday. Similarly there is no bar against the holding of a Meeting of the members other than the AGM at a place other than the place of the company’s Registered  office. This being so , the provisions contained in Rule 17(2) ibid are inconsistent with the provisions of the Act and are therefore doubt of being considered as legally sustainable.

It is also pertinent to note that where it comes to a Requisitioned Meeting , Section 100(5) stipulates as under:

Quote

“A Meeting under sub-section (4) by the requisitionists shall be called and held in the same manner in which the Meeting is called and held by the Board”.

Unquote.

Section 100 of the Act contains the provisions relating to holding of an Extra-ordinary General Meeting. A meeting of the requisitionists is indeed an Extra-ordinary General Meeting , albeit, convened at the behest of the members. From a plain reading of Section 100(5) above, it is clear that for convening a requisitioned meeting   of the Members, the procedure to be followed for holding an Extra-ordinary Meeting should be necessarily complied with. Viewed against the perspective of Section 100(5), it is reiterated that the prescription contained in Rule 17(2)  above and its replication in the standard are not consistent with the Act and in the event of a conflict, the Act shall prevail.

Does the term ”Appointment” include ”ratification”

Section 102(2) of the Act   lays down the items which are to be considered as part of the “ordinary business” which are required to be transacted at an Annual General Meeting. One of the items pertains to the appointment of, and the fixing of remuneration of the statutory Auditors. Readers are aware that u/s 139(2) of the Act, listed companies and companies which satisfy the criteria laid down under Rule 5 of the companies (Audit and Auditors)Rules, 2014 have to appoint Auditors for a term not exceeding five consecutive years subject however to the condition that such appointment shall be subject to ratification of the members at every AGM as stated in the proviso to section 139(1).

It is pertinent to note that the Explanation under Section 139 (1)clarifies that for the purposes of Chapter X of the Act , the term ”appointment” includes “re-appointment” .From the above, it is obvious that “ratification” is not covered within the ambit of the term ”appointment” . As per the legal   lexicon, ratification refers to

 “the confirmation of a previous act done either by the party himself  or by another”.

Considering the above legal position, our humble submission is that section 102(2)   in the Act should have been elongated in scope to accommodate the “ratification” of the appointment of Auditors who have been appointed by the members for time spans longer than one year in line with the requirements of Section 139(2) read with Rule 5 ibid as ratification is an annual feature in such cases.

On the issue of ratification, the ICSI in its responses to queries on SS-2 has clarified as under:

Quote

“Annual ratification is contemplated in law for “continuation of appointment’ of Auditors under Section 139(1) of the Act and Rule 3(7)of the companies(Audit and Auditors)Rules, 204.It falls within the scope of “appointment” and hence is an item of “ ordinary business” to be transacted at the Annual General Meeting”

Unquote  

We have shown above that the term   ”ratification’ is not synonymous with  ”appointment”. Under the law it is necessary for the Company to seek a confirmation from the Auditors that they are eligible for the appointment and that they have not been disqualified in any manner before seeking the ratification of the members to the appointment at every AGM which follows the appointment. The eligibility of the Auditors  for continuation of the appointment has to be ascertained every year, given that one cannot be sure of their eligibility for the appointment during the entire span of their appointment , which is why seeking ratification of the members for the appointment is an annual rigmarole which has to be gone through necessarily .While being respectfully in disagreement with the ICSI’s views on this issue,  we would reiterate our submission that Section 102(2) in the Act needs to be tweaked to cover ratification of appointment of Auditors  in cases where Section 139(2) applies.

Para 5.2 of Standard-Chairman to explain objective of Resolutions proposed

As per the above para, it is required of the Chairman to explain the objective and implications of the resolutions before they are put to vote at the Meeting. He should also provide a fair opportunity to members who are entitled to vote to seek clarifications and/or offer comments related   to any item of business and address the same as warranted.

We would submit that the above para does not have any practical application in the context of listed companies and other companies which  fall  within the ambit of the e-voting process  , in particular while considering that  the  provision of remote e-voting has  now become mandatory for such companies.

Para 16.6.2-Results of voting to be   displayed on company’s Notice Board at the Registered/Corporate offices –Pray why?

As per the above para, the results of the voting of the resolutions proposed at the General Meetings have to be displayed on the Notice Boards of the Company’s Registered/Head/Corporate Offices. One fails to see the purpose of this requirement, given the fact that the company is  already under compulsion to communicate the results of the voting process to the Stock exchanges and also to  host it on the company’s website where it has one. Apart from this, the results are also required to be published in Newspapers. It would be wishful thinking to assume that shareholders will throng the registered offices of companies in eager anticipation of the declaration of the results of the voting process !.Surely results of voting in a General Meeting of a company is not synonymous with Examination results which are awaited by students with bated breaths!.

Unsolicited pontification

The Standard  , in our view pontificates, rather unnecessarily  on certain rudimentary matters. Persons who are expected to embrace the Standard are professionals who are put through a rigorous regime of   study  and are therefore expected to have the required skills associated with record keeping ,  style of drafting minutes etc. Sermons such as the one below are somewhat out of place  ,  incongruous and far too rudimentary  in a document , whose  objective is to standardize processes associated with holding of General Meetings  and usher in a set of principles for convening such meetings and for attending matters incidental thereto.

Quote

Para 17.3.3

“Minutes shall be written in third person and past tense .Resolutions shall however be written in present tense.

Minutes need not be an exact transcript of the proceedings of the Meeting.”

Conclusion

In our discussion above, we have endeavored to examine critically the   nuances of the Standard and pointed out areas where the Standard travels, in our view,  beyond the contours of the Act and the Rules. We have also   dealt with the areas where the standard emphasizes   on certain   basic rudiments needlessly. The importance of having a Standard on a matter such as the conduct of General meetings cannot be over-emphasized. What needs to be done, perhaps   in the times to come is to iron out the areas of conflict with the Act and also to weed out the areas of needless pontification.

Ramaswami Kalidas