Headless and legally unsafe

About three dozen central public sector enterprises (CPSEs), including Coal India, BSNL, NHPC and MMTC, which are currently headless are run in violation of the new Companies Act 2013. The violations also come loaded with penal provisions, unlike in the old Companies Act of 1956.

Appointment of a key managerial personnel (KMP), which includes a managing director (MD), chairman or chairman-cum-managing director (CMD), is central to the enforcement of corporate governance norms as enshrined in the new Companies Act, 2013. Experts term this situation (absence of a full-time chief in a company) as a virtual violation of the provisions of the new company laws, a large chunk of which is implemented since April 1, 2014.

?The absence of personnel in key positions will impact the way the other stakeholders such as the board of directors, audit committee, etc, function and discharge their responsibilities?, said Sai Venkateshwaran, partner and head of accounting advisory services, KPMG India.

Experts said the current state of headless PSUs finds its roots in the norms of the old Companies Act, which made exemptions to government companies. ?Provisions of Section 269 of the Companies Act of 1956 (old Act) required any public company having a paid-up share capital of R5 crore or more to have a managing director or whole-time director or a manager except government companies which were exempted through a notification of January 1978. As per the notification, PSUs exceeding the paid-up share capital of R5 crore, as provided in section 269, did not really need a MD or whole-time director or a manager,? explained Lalit Kumar, partner in J Sagar Associates, a law firm.

Currently, 25 CMD, eight MD and two chairman posts are lying vacant in some leading PSUs, the new government informed the Parliament.

According to a written reply filed by P Radhakrishnan, the new minister of state for heavy industries and public enterprises, the CMD post is lying vacant in Hindustan Photo Films Manufacturing Company, MMTC, Hooghly Dock and Port Engineers, NHPC, and Hindustan Cables among various other PSUs. Similarly, the MD post is vacant in HMT Chinar Watches, Nagaland Pulp & Paper Company, Ferro Scrap Nigam, Dedicated Freight Corridor Corporation of India, Central Cottage Industries Corporation of India, among others.

The situation is even worse for a large number of CPSUs when it comes to the appointment of independent director, directors and other KMPs, said insiders. According to one estimate, there may be more than 200 vacant positions of directors and independent directors on the boards of over two-dozen PSUs.

But the Companies Act 2013 brings in enhanced responsibility as well as accountability on people involved in the management and governance of companies by the codification of duties of directors, and mandating companies to have designated KMP. ?If a company does not have a CEO or MD, then it likely to be non-compliant with the requirements of section 203 of the Act, unless it has a whole-time director designated as a KMP?, said Venkateshwaran of KPMG.

According to company law experts, Section 203 of the Companies Act, 2013 requires all listed companies/public companies having a paid-up share capital of R10 crore or more to have whole-time key managerial personnel, namely MD/CEO or manager.

Unlike the old Act which exempted government companies from various regulatory provisions, an exemption similar to the one above has still not come for Section 203 of the Companies Act, 2013. ?Therefore, a PSU which meets any of the criteria of being a listed company or public company having a paid-up share capital of R10 crore or more legally needs to have a MD/CEO/manager and in their absence a whole-time director?, said Kumar of JSA.

According to Abhay Gupte, senior director, Deloitte, if the company contravenes the provisions of section 203, it shall be punishable with fine of R1 lakh-R5 lakh and every director in default to be punishable with fine of up to R50,000 and a further fine which may extend to R1,000 for every day after the first during which the contravention continues. ?One of the critical challenges in this aspect includes preparation and filing of financial statements and the board?s report, where any contraventions by the company attract a fine of R1,000 for every day for which the failure continues, up to a maximum of R10 lakh?, said Gupte.

The presence of a KMP, especially the head of a PSU, is also required to tackle a slew of regulatory issues arising out of not just the new Companies Act of 2013 but also from the new norms on corporate governance proposed by the Securities and Exchange Board of India (Sebi). These are to be implemented from October 1, 2014.

For PSUs that are already getting affected by the high-level vacancies, the need of the hour remains speedy appointment of full-time CMDs, MDs and chairpersons.