It was a case of fixing responsibility on a company for a bounced cheque in 2005, where the Supreme Court found out that there were no provisions in the Companies Act to hold a particular officer responsible and punish him. The definition of ?officer in default? for offences committed by a company was so vast in the 52-year-old Companies Act of 1956 that practically the blame couldn?t be pinned on anyone.
That position is about to change. The Companies Bill, 2008, has narrowed the definition for officers in default in listed companies to three key managerial positions?-the company secretary, the chief financial officer and the chief executive officer. This is a major departure from the current definition in Section 5 that includes the managing director, the whole time directors, the manager, the secretary and ?any person in accordance with whose directions or instructions the board of directors of the company is accustomed to act?. Corporate lawyer Jay Savla says the definition basically was too broad to make it work, making it very difficult to pin responsibility.
The changes are aimed at bringing the new Companies Bill in consonance with the current corporate scenario that demands much more diligence in corporate accountability. The bill will be introduced in Parliament in the forthcoming session.
The draft bill says these three top executives will share the overall responsibility and will be answerable for all the affairs of the company with respect to the provisions of the Act. Since the three officers cannot by definition hold any paid position in another company, the line of responsibility will be clear. Accordingly every listed company shall be required to identify these three officials.
?With this action coming into force, the CEO, CFO and CS will no longer be able to hide themselves behind the corporate veil?, said an official of the ministry of company affairs.
The bill also says that the names of these three people acquiring the most important positions should be mentioned in the annual report of the company.
Rajan Gupta, partner of the leading corporate law firm, Fox Mandal Little, told FE, ?This is an important step for the purpose of fixing responsibility from the point pf view of legal, administrative and financial compliances. At present, in the Companies Act, 1956, officer in default is covered under a very wide definition, including all directors, auditors and other officers, which makes fixing responsibility difficult. But, by defining the key managerial position, it would be easier to fix responsibility on a particular person for the defaults.
The other major change proposed in the bill is to remove the provision for a managing director of an Indian company to be resident in India.
This means Schedule-13 of the Companies Act 1956 that made it mandatory for the managing director and the whole time director of the company to be resident Indians will be modified. There will also be a concurrent amendment of section-269, which says, ?A company requires taking prior permission from the central government for appointment of managing director if the conditions prescribed in schedule-13 are not complied with.?
As per the new Bill, even if a single director is a resident in India that will be a sufficient compliance of the company law provisions. Apart from one director, all other directors including MD and whole time directors may be non-residents of India.
Gupta said this would give companies much more flexibility to operate their businesses. Mulitnational companies with Indian subsidiaries are often reluctant to change key personnel just on the basis of nationality and this change is therefore significant.