Decoding The Updated Secretarial Standards

This article discusses the key changes introduced in the updated Secretarial Standard on Meetings of the Board of Directors and the Secretarial Standard on General Meetings which are effective from 1 April 2024.

The Secretarial Standard on Meetings of the Board of Directors (SS-1) and the Secretarial Standard on General Meetings (SS-2) issued by the Institute of Company Secretaries of India (ICSI) set out guidelines that companies must adhere to when conducting meetings of their board of directors (Board) and shareholders.¹

In February 2024, the ICSI issued revised drafts of SS-1 and SS-2 which will come into effect from 1 April 2024. This article delves into the key changes introduced by the revised secretarial standards.

Board Meetings

Not-for-Profit Companies and Exemptions to Other Classes of Companies

At present, SS-1 does not apply to one-person companies with only 1 director and not-for-profit companies registered under Section 8 of the Companies Act, 2013 (Act). There are also specific exemptions for private companies and government companies under the Act. However, with effect from 1 April 2024, the exemptions available to not-for-profit companies, private companies and government companies will not be available if such companies have defaulted in filing their financial statements or annual returns with the Registrar of Companies. This amendment addresses the concerns of the Ministry of Corporate Affairs (MCA) with regard to companies' continued failure to satisfy annual compliance requirements.

Participation in Meetings Through Electronic Mode

Under SS-1, directors are prohibited from participating in meetings electronically where the agenda includes the approval of financial statements, the Board's report, prospectus, amalgamation, merger, acquisition, demerger or takeover.²

Section 173 of the Act, as amended in 2017,³ provides that directors may participate in meetings where such matters were being approved through electronic mode as long as the directors physically present at the meeting constituted a quorum.

SS-1 has now been amended to permit electronic attendance of Board and committee meetings at which restricted items are to be approved provided that the directors present in person constitute a quorum.

In addition, from April 2024, notice from a director of their intention to attend meetings through electronic mode will be valid for the entire financial year.⁴ Directors who have provided such intimations may nonetheless attend meetings in person after providing sufficient notice of their physical attendance to the company.

Definition of Unpublished Price Sensitive Information:

At present, under SS-1, 'unpublished price sensitive information' includes information pertaining to:

1. financial results;
2. dividends;
3. change in capital structure;
4. mergers, de-mergers, acquisitions, delisting, disposals and expansion of business and such other transactions;
5. changes in key managerial personnel; and
6. material events in accordance with the listing agreement.

The definition has now been aligned with that in the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015, and, as a consequence, no longer includes 'material events in accordance with the listing agreement'.⁵

Frequency of Board Meetings for Start-Ups

All companies, other than one-person companies, small companies⁶ and dormant companies,⁷ must hold 4 board meetings annually, and the gap between 2 meetings should not exceed 120 days.⁸

From April 2024, registered start-ups⁹ may hold only 1 board meeting in each half of the calendar year, provided that the gap between the 2 board meetings is not less than 90 days. This is consistent with the Government's position as reflected in Section 173(5) of the Act and the MCA exemption notification dated 13 June 2017.

Meeting of Independent Directors

SS-1 provides that, where a company is required by the Act to appoint independent directors, the independent directors shall hold at least 1 meeting every calendar year. The amendments to SS-1 have changed this requirement to 1 meeting in every financial year. The amendment also clarifies that non-independent directors and members of management cannot attend these meetings. This is consistent with the amendments made to Schedule IV to the Act (Code for Independent Directors) in 2017.

Quorum for Board Meetings of Private Companies – Interested Directors

SS-1 permits a director of a private company to participate in respect of an item in which they are interested, after disclosing their interest but is silent as to whether they will be considered for the purpose of determining quorum.

Although Section 174(3) of the Act provides that the quorum for a private company would be constituted by the presence of at least 2 non-interested directors, the MCA has since clarified¹⁰ that an interested director of a private company who has disclosed their interest may be counted towards quorum. From April 2024, SS-1 will be aligned with the MCA's position in that a director who has disclosed their interest may be considered towards quorum. The same will also be true for chairpersons of private companies who have disclosed their interest.

Proof of Sending and Delivery of Draft Resolutions

SS-1 requires that proof of sending and delivery of draft resolutions and the necessary papers be maintained for 3 years from the date of the meeting or such longer period as decided by the Board. To account for resolutions passed through circulation, SS-1 has now been amended to require that these documents be preserved for at least 3 years from the date of circulation of the resolution.

Filling Casual Vacancies

SS-1 provides that, subject to the articles of association of the company, a casual vacancy cannot be filled by passing a circular resolution, and such vacancy should be filled at a Board meeting. Once the amendments to SS-1 become effective, a vacancy on the Board may be filled only by a board resolution passed at a board meeting provided that the appointment is approved by the shareholders at the next general meeting.

Section 161(4) of the Act provides that if the office of any director appointed by the company in general meeting is vacated before his term of office expires in the normal course, the resulting casual vacancy maybe filled at a meeting of the board, if allowed under the articles and such appointment shall be approved in immediate next general meeting. Therefore, the position in Revised SS-1 is now aligned with the Act.

General Meetings

Not-for-Profit Companies and Exemptions to Other Classes of Companies

Like SS-1, from April 2024, the exemptions available to not-for-profit companies, private companies and government companies will only be available if such companies have not defaulted in filing their financial statements or annual returns with the Registrar of Companies.

Venue for General Meetings

SS-2 requires that the annual general meeting (AGM) be held either at the registered office of the company or at some other place in the same city as the registered office. SS-2 does not mandate the location for extra-ordinary general meetings (EGM).¹¹ From April 2024, SS-2 will provide that:

1. An unlisted company may hold its AGM at any place in India if all shareholders have provided their consent prior to before the meeting. this consistent with Section 96 of the Act which permits the holding of AGMs anywhere in India with the prior approval of all shareholders;¹²
2. An EGM may be held at any place within India. This is consistent with the position under the Act; and
3. The wholly-owned subsidiary of a company incorporated outside India may hold its EGMs outside India.

Consent to Shorter Notice

SS-2 permits the holding of a general meeting¹³ on short notice with the prior consent of 95% of the shareholders entitled to vote. Once the amendments become effective, the requirements for holding AGMs and EGMs at shorter notice will differ:

1. AGMs may be held at shorter notice if consent is given by not less than 95% of the shareholders entitled to vote; and the financial statements and other documents required to be annexed in the notice for the AGM may be given at a shorter period of time if written consent is obtained from of shareholders in writing is obtained from the majority of shareholders entitled to vote, representing not less than 95% of the paid-up share capital allowing voting at the meeting , or, in the case of a company without a share capital,, from shareholders holding not less than 95% of the total voting power at the meeting; and
2. EGMs may be held at shorter notice with the prior written consent of the majority of shareholders entitled to vote, representing not less than 95% of the paid-up share capital allowing voting at the meeting , or, in the case of a company without a share capital.

Voting Rights of Related Party Shareholders

SS-2 proscribes shareholders from voting on resolutions approving contracts where they are related parties. However, this restriction does not apply to:

1. Private companies; and
2. Government companies where the contract is between 2 or more government companies, and, or, where a contract is being entered by an unlisted government company with prior approval of the competent authority.

From April 2024, the proscription on voting on related party transactions will not apply to the approval of related party contracts where than 90% of the shareholders are relatives of the promoters or related parties. The amendments also clarify that, in case of wholly-owned subsidiaries, a resolution passed by the holding company shall be sufficient for entering into the transaction with the holding company.

Voting through Postal Ballot and E-voting Facilities

At present, a company with more than 200 shareholders must transact certain prescribed items of business only through postal ballot and not at general meetings. However, from April 2024, such companies will be permitted to transact those matters at general meeting if they are required by law to provide e-voting facilities.¹⁴ Under SS-2, a resolution passed by postal ballot may be rescinded only by a subsequent resolution passed by postal ballot. However, from April 2024, companies which are required to provide e-voting facilities may also rescind resolutions passed by postal ballot at general meetings.

Looking Ahead

The amendments to the secretarial standards reflect a focused effort to enhance corporate governance practices. This is particularly evident from the fact that exemptions will not be available to companies who default on filing their financial statements and, or, annual returns with the Registrar of Companies. The revised secretarial standards also align with the amended provisions of the Act, facilitate ease of doing business and faster decision making, and will bring in efficiency, and accountability.

It is important that companies and other stakeholders adapt to the changes and stay proactive to ensure effective implementation from April 2024.

Footnotes

1. Section 118(10) of the Companies Act, 2013 mandates adherence to the secretarial standards.

2. Similar restrictions also applied to meetings of the audit committee for approval of annual financial statements and consolidated financial statements.

3. By the Companies (Amendment) Act, 2017.

4. Currently, such notice is valid for the entire calendar year.

5. The reference to the listing agreement was deleted from the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 with effect from 1 April 2019.

6. A small company is a private company with a paid-up share capital of INR 4 crores or less and turnover of INR 40 crores or less but does not include a holding company, subsidiary company, a not-for-profit company, or a company governed by any special legislation.

7. A dormant company is a company registered under the Act, incorporated for a future project or to hold an asset or intellectual property and has no significant continuing transaction and has made an application to the Registrar of the Companies under Section 455 of the Act.

8. One-person companies, small companies and dormant companies need only hold 1 board meeting in each half of the calendar year, provided there is a gap of at least 90 days between the meetings.

9. An entity will be considered a start-up: (i) for the first 10 years following its incorporation if it is incorporated as a private limited company or limited liability partnership, or established as a registered as a partnership firm; (ii) if its turnover in any previous financial years does not exceed INR 100 crores; and (iii) if the entity is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.

10. By its notification of 13 June 2017.

11. That said, the Act stipulates that EGMs must be held in India.

12. Through electronic mode.

13. Whether AGM or EGM.

14. Under Rule 20 of the Companies (Management and Administration) Rules, 2014, listed companies and companies having more than 1,000 members are required to provide e-voting facilities to its members.

Originally published 12 March 2024

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.