No.2/5/2001-CL.V
Government of India
Ministry of Law, Justice & Company Affairs
5th floor, `A’ Wing, Shastri Bhavan,
Dr. R.P. Road, New Delhi.
Dated: 22.3.2002
To
All
Regional Directors
All Registrars
of Companies
Subject: Disqualification of Directors under
Section 274(1)(g) of the Companies Act, 1956 – Clarification
Sir,
As you are aware,
the provisions of Section 274 of the Companies Act, 1956 were amended through
Companies (Amendment) Act, 2000 (w.e.f. 13-12-2000) and a new clause (g) was
inserted to sub-section (1) of this Section.
Through this clause a director of a public company, which has made
defaults in filing of annual accounts and annual returns and in repaying
deposits/interests thereon on due date or redeeming its debentures on due date
or in paying dividend for period specified in that Section, is disqualified to
be appointed as director of other public companies for a period of five years
from the date on which such public company(ies) so defaulted.
2. A high proportion
of the companies had been defaulting in filing the annual accounts and annual
returns and a large number of companies were defaulting in repayment of
deposits/interest thereon and in redemption of debentures which put investor to
lots of hardships and the remedial action including a deterrent punishment to
the errant directors was essential. But
ironically, the errant directors were not only continuing in the defaulting
companies but becoming directors in other companies too. It was in this context that in the Companies
Act, 1956 the new sub-section 274(1)(g) was inserted and the RBI also took some
remedial measures.
3. The intention and
purpose of the above amendment was to disqualify the errant directors, protect
the investors from mismanagement, ensure compliance in filing of annual
accounts and annual returns which are the means of disclosure to all the
stakeholders, increase the compliance rate of filing of the statutory documents
and infuse good corporate governance in the regulation of corporate affairs in
the country.
4. The Department,
however, has received representations from Public Financial Institutions,
Government owned financial companies and other Financial Institutions and
Companies in respect of these provisions.
The Banking Division in the Finance Ministry has also supported the
apprehension of the Financial Institutions. The representations have
been considered carefully keeping in view on the one hand, the need for strict
compliance with the provisions of the clause (g) of sub-section (1) of Section
274 of the Companies Act, 1956 and on the other hand the non-obstante clause in
statutes of some of the Public Financial Institutions and the special situation
of the nominee directors of Public Financial Institutions/Banks and the
nominees of Central and State Government companies.
5. The Government has
decided to (i) clarify the legal position in respect of the Public Financial
Institutions/Banks having non-obstante clause in their statute (ii) to give
some relief to the nominees of the Public Financial Institutions/Banks/Central
and State Government; and (iii) to exempt Government Companies from the
applicability of the provisions of Section 274(1)(g) of the Companies Act,
1956.
6. While considering
the applicability of the provisions of Section 274(1)(g) of the Companies Act,
1956, the Government has taken into account the following points:
(i)
In addition to protecting the interests of the Public Financial Institution/Bank
which they represent, the Nominee Directors are also expected to serve the best
interest of sound public policy and bring about higher levels of corporate
governance.
(ii)
In view of implicit disqualification in Section 274(1)(g),
qualified and experienced professionals, both official and non officials,
suitable for being appointed on the Boards of assisted concerns may not
agree/available, thus adversely affecting the interests of the Financial
Institutions.
(iii)
Presence of the Nominee Directors on the Boards of assisted
concerns and close monitoring through them of all the affairs of the assisted
concerns is far more desirable when the company is in default to the
Banks/Financial Institutions.
7. However, the
Government hereby further clarifies that the Nominee Directors of Public
Financial Institutions/Banks/Government should in order to avail the relief
granted are expected to comply with the following:-
(i)
The Nominee Directors are expected to work assiduously towards
observance of good corporate governance practices in the company with due
regard to the legitimate interests of the various stakeholders. The various provisions relating to good
corporate governance have been introduced in the Companies Act Rules/Regulations
and clause 49 of the Listing Agreement introduced by the SEBI. The Nominee Directors are expected to study
these provisions of corporate governance and have them implemented.
(ii)
Ensure that the operations of the company are conducted in
consonance with public policy.
(iii)
Ensure strict compliance in letter and spirit of all the statutory
provisions in particular the provisions of the Companies Act and the
regulations, clarifications etc. issued there under. It is the duty of the nominee directors to fully acquaint
themselves in the relevant provisions of the Company Law and ensure that
measures are instituted to monitor and certify that these statutory provisions
are being observed.
(iv)
The Nominee Directors should see that important committees of the
Board of Directors are constituted and are functioning effectively such as
Audit Committee, Nominations Committee, Remuneration Committee etc. The Nominee Directors are expected to seek
membership of these important committees and through their active participation
in such committees ensure that the objectives of setting up these committees
are being achieved.
(v)
The Nominee Directors are expected to regularly attend and actively
participate in the proceedings of the Boards and in committee on which they are
included. Their frequent absence for insufficient
reasons from the meetings of the Board of Directors/Committees would negate the
purpose for which the Nominee Directors have been nominated by the Institutions
and they would not be able to perform the various responsibilities listed out
in this paragraph.
(vi)
Duly safeguard the interest of the Government/Banks/Financial
Institutions which they represent.
Ensure proper utilization of financial assistance by the assisted
company and prevent any misuse/diversion of funds by the promoters/management
of the companies.
(vii)
Provide adequate feedback to the nominating
Institutions/Banks/Companies on the affairs and operations of the assisted
concerns.
(viii)
The Financial Institutions are expected to closely monitor the
participation by the Nominee Directors in the Boards/Committees as above and to
ensure that they are discharging their responsibilities as listed out
above. In case any Nominee Director is
failing to discharge his/her responsibilities the Institutions are expected to
take steps to replace him/her. The
Institutions are also expected to send a six monthly report to the Department
of Company Affairs (ROC) bringing out the steps taken by them to ensure that
their Nominee Directors are discharging their responsibilities. The Financial Institutions should also in a
separate section of their Annual Report clearly bring out the measures
instituted by them to ensure that the system of Nominee Directors is
functioning effectively.
8. Accordingly, it is clarified that:
(i)
Nominee Directors appointed by the Public Financial Institutions
and Companies established under the Acts of Parliament having non-obstante
provisions over the Companies Act, 1956, like IDBI, LIC, UTI, IIBI etc., in
their respective statutes shall not be liable to be disqualified for
appointment as directors by virtue of Section 274(1)(g) of the Companies Act,
1956.
(ii)
Nominee Directors appointed on the Boards of assisted concerns or
other public companies by (a) public financial institutions within the meaning
of Section 4A of the Companies Act, 1956; (b) Central or State Government: and
(c) banking companies are also exempt from the provisions of Section 274(1)(g)
of the Companies Act, 1956.
9. All Regional
Directors/Registrars of Companies are, therefore, directed not to take action
under Section 274(1)(g) of the Companies Act, 1956 in respect of the above
directors.
Yours faithfully,
(Thakur Sharan)
Under Secretary to the Govt.
of India
Tel. No. 3389622