Govt may rethink plan to allow CFOs, CSs to resign without notice period

The review comes in the backdrop of stiff opposition from the India Inc which believes that the rule will disproportionately benefit KMPs while posing practical challenges for the companies. “Due to the concerns raised by some sections of Corporate India, the government is ready to re-examine the provision. Currently, a parliamentary committee has been tasked to seek industry inputs on the Bill and review it, but we will be closely monitoring the industry response,” the official said.

The person, however, added that the government’s intent while introducing the provision in the Bill was to bring transparency in the appointment and resignation of the KMP. It is unclear if the provision would be dropped entirely or tweaked to make it more acceptable by company promoters.

What does the new section of the bill dictate?

Under a new Section 203(A) of the Bill, a whole-time KMP, who is not a director, can resign from his or her office by giving a notice in writing to the company, and the Board will have to accept the resignation and immediately inform the Registrar of Companies (RoC) of such resignation.

The resignation of a such KMP will take effect from the date on which the notice is received by the company or the date specified by such KMP in the notice, whichever is later. Further, the provision said that if the company fails to inform the RoC within a specified time, the said KMP can forward a copy of the resignation along with detailed reasons to the RoC.

The goverment wanted the new rule to primarily cover positions like chief financial officers (CFOs), company secretaries and managers. It sought to provide a fallback mechanism for cases where the company refuses to act upon the resignation notice, thinking that the norm will hugely benefit KMPs while ensuring that their liabilities doesn’t in case of any wrongdoings.

The proposed norm specifically clarifies that liability for defaults during their tenure does not extinguish even after the resignation.

What do experts say?

Experts said that the proposal is already receiving flak from the India Inc. “Given the fact that we are talking about a senior position, a resignation without applicable notice period seems unacceptable. At the level that we are talking about, there is a hand-over, take-over, and transitioning required.

The idea of a key managerial position is that the existence or departure of the person matters a lot to the corporate governance,” said Vinod Kothari, managing partner at Vinod Kothari & Company. “It’s difficult to understand who is going to benefit from this provision. It surely does not serve the interest of companies. As regards KMPs, one does not fully understand the exact concern that the proposed amendment is trying to resolve,” said a corporate law expert.

Even though the proposed norm might be in violation of the employment agreements of companies, the government might tweak the provision to hold KMPs accountable for breaching such agreements. “It’s likely the KMP will be subject to contractual terms agreed with the company and may be required to recompense for breach of the contractual terms,” said Satwinder Singh, founder and managing partner of Aekom Legal.

Experts said that the provision was likely introduced in the Bill in the light of Kerala High Court’s February judgement on Greevas Job Panakkal vs Traco Cable Co case in which the court ruled that the refusal to accept resignation of an employee amounts to bonded labour under Article 23 of the Constitution of India.

The Bill is currently being scrutinised by a 31-member joint parliamentary committee (JPC) after it was introduced in the Lok Sabha in March this year. The JPC will take stakeholder inputs before submitting its recommendations to Parliament.