New secretarial standards to boost investor confidence: Atul Hasmukhrai Mehta

Interview with President, ICSI

Recently, the Institute of Company Secretaries of India (ICSI) issued two new secretarial standards, to be applicable from July 1 this year. While one does away with the practice of distributing gifts at shareholder meetings, the other gives an advance notice to shareholders to explain in detail each item for which a company seeks approval at a board meeting. Atul Hasmukhrai Mehta, the president of ICSI, says these standards are aimed at ensuring transparency and better governance in boardrooms. In an interaction, Mehta talks to Sudipto Dey about the impact of these standards on a company's operations. Edited excerpts:

How will shareholder and board meetings be different from July 1?

The institute has certain secretarial standards for its members to follow, in terms of an advance notice for a board meeting, issuing an agenda for a meeting of a board of directors, etc. But we found many private limited companies weren't serious about following these. So, the institute has made it mandatory for all companies - both public and private limited - to send a notice for a board meeting seven days in advance. For any approval from the board, the agenda for the board meeting has to be supported with notes on the items. For any decision related to financial results, dividend distribution, a change in the capital structure and information related to key managerial personnel at a board meeting, the board has to be informed in advance. The other new standard issued by the institute relates to shareholder meetings (companies are not allowed to give gifts to shareholders). From July 1, these two standards will be mandatory, in line with the Companies Act.

Adoption of these standards will increase corporate governance and lead to more clarity in the proceedings at a board meeting, especially for private limited companies. It will also reduce litigation. Many litigation cases result from disputes arising due to board meeting notices not being sent, the agenda being introduced without sufficient notice, etc.

This will also increase the confidence of investors such as private equity players and foreign investors who want to invest in private limited companies. Many private equity players have already welcomed this move. We are coming out with a guidance note on how to follow the two standards.

Are there any penalties for not following these?

For any default in compliance at a meeting, a company is liable to pay a penalty of Rs 25,000 and each officer (in charge of the meeting) is liable to pay Rs 5,000. These penalties also apply to cases of distributing gifts at shareholder meetings.

Will these penalties have a deterrent effect?

This penalty has been introduced for the first time and applies to all companies. Most large companies go beyond secretarial standards; the problem arises with smaller companies, which aren't used to following secretarial standards. India has a million registered companies, perhaps the most in the world. Of these, about 5,300 are listed, again one of the highest in the world. About 900,000 are private limited companies.

Now, shareholders can file class action suits, according to the new company law. Does this make life difficult for auditors?

If statutory and secretarial auditors are found guilty of lapses, shareholders can file class action suits against them, as well as the company. Now, secretarial auditors are on a par with statutory auditors, with similar responsibilities, liabilities and penalties. So, they cannot take things lightly. Non-compliance has a high cost.

Are you coming out with similar standards in other areas, too?

We are trying to save our members from the hassle of class action suits. As a preventive measure, they should follow the standards laid out by the institute. We are preparing a guidance note on standards for corporate social responsibility, managerial remuneration, independent directors, key managerial personnel, mergers & acquisitions and corporate restructuring, board evaluation, deposits, anti-fraud and whistle-blower mechanism, prevention of insider trading, and class action suits. These standards will be advisory and will be introduced in a phased manner, through the next 12 months.

For the first time, we will have secretarial audit, a non-financial audit to check whether a company follows all the laws applicable to it. This is mandatory from 2014-15 and applicable to listed companies, public limited companies with paid-up capital of at least Rs 50 crore and public companies with a turnover of at least Rs 250 crore. For companies and key managerial personnel, the penalty for non-compliance ranges between Rs 1 lakh and Rs 5 lakh.