Board Meeting Process Revisited: Secretarial Standard 1

Introduction

The objective of Companies Act, 2013 (“Act”) to a large extent is to ensure good corporate governance by enhancing transparency and accountability. Section 118(10) of the Act imposes an obligation on companies to observe secretarial standards regarding general and board meetings as specified by the Institute of Company Secretaries of India. To effect this, Ministry of Corporate Affairs notified two relevant secretarial standards, 1 & 2, on April 23, 2015, respectively SS-1 and SS-2. The former prescribes the process for board meetings (“BM”) while the latter relates to general meetings. Both the standards shall come into effect from July 1, 2015 and all companies will need to follow them.

This bulletin highlights the process for conducting BMs of only private limited companies after the notification of SS-1 and its impact thereon.

1. BM Process Changes

As noted, effective July 1 all Indian companies will have to comply with the provisions of the Act, articles of association¹, applicable rules and SS-1. The section below describes the process for conducting meetings of a private limited company factoring the foregoing. Indian law mandates four meetings a year and the gap between two meetings must not exceed 120 days. If any meeting is adjourned, the gap will be counted from the original meeting only. Meetings must be serially numbered and may be convened at any time, place and day excluding national holiday.

• Notice and Agenda – The company secretary (“CS”) or a director or any authorized person has to circulate written notice and agenda with the notes to agenda² to all directors, including alternate, by hand, post or e-mail at least seven days prior to a meeting. This minimum period gets extended by another two days if the company sends it by post. And, if it does, it must necessarily maintain proof of dispatch. Notice should also contain serial number, day, date, time and full address of venue of the meeting. Further, where the meeting may be conducted by video-conference, the notice should provide a contact number or e-mail address³ and the directors must confirm their participation (through electronic mode) in advance. Any additional agenda item can be taken up in the meeting, if the chairman and majority of directors permit. Further, if the company holds a meeting at shorter notice for urgent matters, notice should expressly state this. The minutes in both the cases should be ratified by majority of directors.

• Quorum – The quorum for a meeting is 1/3^rd of total number of directors or two, whichever is higher, unless articles change this requirement. Directors participating through

video conferencing are counted for quorum and also the interested directors⁴ after disclosure of their interest⁵. If there is no quorum, the meeting must be adjourned. Such adjourned meeting must be held at the same time, place and day in the next week. If there is no quorum at the adjourned meeting, it will stand cancelled. Further, quorum needs to be present throughout the meeting. A director may take leave of absence from a meeting but failure to attend a single meeting in twelve months, notwithstanding grant of leave of absence, is a ground for disqualification.

• Chairman – The chairman of the company is usually the chairman of the board as well. If there is no chairman or when the chairman is absent, the directors have to elect a chairman amongst themselves. If chairman is interested in any matter, he will have to appoint another director to act in his place for that specific matter. He has a casting vote in case of equality of votes, if not prohibited by articles.

• Participation through electronic mode – The Act permits directors to attend BM through video-conferencing or any other audio-visual means.⁶ The Act imposes restriction on approval of certain items through electronic means such as approval of annual financial statements, board’s report and matters relating to amalgamation, merger, demerger, acquisition and takeover. However, SS-1 removes this restriction if express permission of the chairman is obtained. A roll call has to be taken at the commencement and the closure of the meeting to ensure the presence of quorum all through the meeting.

• Attendance register⁷ – The Act does not prescribe the manner of maintaining attendance register. SS-1 mandates maintenance of separate register which should contain the serial number, date, place, time of meeting, names and signatures of the directors, CS and invitees present. The pages must be serially numbered and bound periodically depending on its size, if it is in loose-leaf form. It should be authenticated and preserved for at least eight financial years by the CS or any authorized director, if there is no CS. In case of participation of directors through video conferencing, mere noting of their names in the register stating that they were present through video conferencing would be as good as their signatures.

• Resolution by circulation – The Act permits circular resolutions which should be noted at the next BM. However, if 1/3^rd directors require any resolution to be passed at a physical meeting then it cannot be passed by circulation. SS-1 has supplemented the provisions for passing circular resolutions in paragraph 6. The chairman of the board or

managing director (“MD”) or whole-time director or any other director, other than an interested director should decide that a particular resolution will be passed by circulation or not. The draft resolution is to be circulated to all directors by hand, post or e-mail with a note stating the details, nature of interest of the interested directors, method of giving consent and other material facts. If the company sends it by post, it must necessarily maintain proof of dispatch. The company can fix any date as the last date for receiving directors’ assent or dissent which cannot be beyond seven days from the date of circulation and interested directors cannot vote. The effective date of resolution would be the last date for giving consent or the date on which consent of two-third directors is received, whichever is earlier.

The Act specifically prohibits about 13 matters which cannot be passed by circular resolution and must necessarily be passed at a physical meeting. Amongst others, these include making calls for unpaid money on shares; authorizing buy-back; issuing securities including debentures in or outside India; borrowing monies etc. SS-1 has augmented this list by adding seven more items⁸ which include considering the compliance certificate to ensure compliance with all applicable laws; approving remuneration of MD, whole-time director, manager; according approval for related party transactions outside the ordinary course of business or not on an arm’s-length basis etc.

• Minutes – Companies are required to maintain minute books. Paragraph 7 has added certain timelines for finalization of minutes. It is now mandatory to circulate draft minutes (by hand, post or electronically) to all directors for their comments within fifteen days from conclusion of the meeting. The directors must communicate their comments within seven days from the date of circulation. Chairman should sign the minutes once they are finalized. The CS or any authorized director if there is no CS, must certify the signed minutes and circulate it to all directors within fifteen days of signature. The chairman of the same meeting or the next meeting has to initial each page and sign the last page of the minutes. The minutes should be entered in the minute book within thirty days of the meeting and no alteration is allowed thereafter.

SS-1 has supplemented some more provisions for maintenance of minutes such as

(i) meetings, resolutions and minute sheets should be serially numbered; (ii) loose-leaf minute sheets should be bound and kept in the safe custody of CS at the registered office or at any other place with board’s approval; (iii) minutes must contain company’s name, serial number, type, day, date, venue and time at the beginning and conclusion of the meeting; (iv) chairman’s name will come first followed by the names of other directors in alphabetical order; (v) unambiguous language and fair and correct summary of the notings’ and resolutions passed.

Further, SS-1 has widened the scope of the maintenance of minutes. Companies can maintain them electronically, but will have to comply with the provisions of time stamp which means that the real time of an event is recorded by a secure computer system.⁹ It adds

the time to a file which helps in keeping track of the timings when data is added, removed, sent or received. Electronic minutes will have to be digitally signed by chairman.

• Disclosures – Paragraph 9 requires companies to disclose the number and dates of meetings held during the financial year and number of meetings attended by each director in their annual reports and annual returns. A practicing CS while certifying the annual return should also certify that the SS-1 has been duly complied with. There were no such provisions under the Act.
  

2. Impact

SS-1 applies to board and committee meetings of all companies¹⁰ irrespective of their size, type and listing status unless specifically excluded. Failure to comply with SS-1 will lead to a penalty of INR 25,000 (USD 392 approximately) on the company and every officer-in- default shall be liable to a penalty of INR 5,000 (USD 79 approximately).¹¹

If a particular standard or any part thereof becomes inconsistent with the Act due to any amendments, the provisions of the Act shall prevail. SS-1 does not seek to substitute any provisions of the Act but, aims to supplement it.

It is clear from the above that the procedure for BMs has become more stringent and cumbersome. There is no flexibility for even closely-held private companies and unlisted public companies regarding the manner of conducting the meetings. On the other hand, even though, the process is made cumbersome and stringent, it will hopefully lead to better disclosures, more procedural clarity, transparency in board proceedings and accountability of responsible company officers. It has removed many ambiguities; for example, convening meeting at a shorter notice with consent of majority directors, provisions with regard to the minutes etc. This in turn will enhance corporate governance standards and investors’ confidence. Although many provisions were voluntarily practiced by several companies, SS-1 has expressly mandated them for all companies now.

Conclusion

The provisions concerning meetings enabled companies to follow varied and diverse secretarial practices. With introduction of SS-1, a uniform guide for companies to conduct meetings and maintaining corresponding records is put in place. A critical concern arises as to whether non-compliance with SS-1 will nullify board decisions taken in such meetings. It is too early to come to a conclusive stance on that – a conservative approach may view resolutions passed at such meeting as invalidated while a liberal approach may vest the company with the power to ratify decisions taken in such a meeting. Since the fundamental objective is to put in place a uniform process, it will be necessary to adhere to the process supplemented by SS-1.

Authored by:
Jaya Moorjani

1 Table F contains model clauses for company’s articles of association. It is a matter of practice that companies typically adopt the model form without repeating all the provisions. If some provisions are modified, the articles provide this expressly
2 Paragraph 1.3.7 makes the circulation of notes to agenda mandatory
3 Paragraph 1.3.4 makes it compulsory to provide contact details in the notice
4 A director should not be directly or indirectly interested in a contract or arrangement. Interest arises if the contracting party is the director’s relative or a firm in which the director or his relative is a partner, or a company in which such director is a director or member, or n association of individuals in which he or his relative is a member
5 A circular issued by Ministry of Corporate Affairs on June 5, 2015 permits the interested directors of a private limited company to participate in the matters in which they are interested after their disclosure of interest. The circular specifically talks about the participation and not voting, hence, this needs to be clarified further by the Ministry
6 Video conferencing or other audio visual means as may be prescribed, should help directors to communicate with each other without any intermediary and interruption and such devices should be capable of recording proceedings of the meeting
7Paragraph 4 reproduces the process for maintenance of attendance register which was practiced by companies but no specific procedure was given under the Act
8 Annexure A to SS-1 provides for twenty two items, out of which, fifteen are prescribed under the Act as well 9 A system reasonably reliable and secure from unauthorized access or misuse. It should be correct and support generally accepted security features
10 The exception is one person companies that have only one director on its Board
11 Section 118(11)