7/27/2018 2 Comments
Ethical Values in Corporate Governance - Role of PCS and Disciplinary Proceedings Against Them
Delep Goswami, FCS, Advocate, Supreme Court of India,
Anirrud Goswami, Advocate, Goswami & Goswami,
Published in July 2018 issue of Chartered Secretary (ICSI)
Paramount Need for Ethical Governance
While inaugurating the ICSI Centre of Excellence at Hyderabad in September 2017, the Hon’ble Vice President of India, Sri M. Venkaiah Naidu said that strong foundation in ethical values should be the basis for exemplary corporate governance. He also said that in the wake of globalization and increasing role of corporates in driving the economies, it has become imperative for professionals like company secretaries to acquire cutting-edge knowledge and skills that are not only in tune with the best practices, but also facilitate and promote good corporate governance. He further said that India, with its inherent spiritual strength, rich traditions and strong value systems – which form the core of many family-run businesses – can emerge as a role model for other countries in corporate governance and that the practitioners of corporate governance, like the Company Secretaries, should play a leading role in making India a global leader in their field. He also emphasised that before looking elsewhere for lessons in corporate governance, one should look inwards and what better than Kautilya’s Arthashashtra, because the principles and practices on economic management written by Kautilya in the 4th Century B.C. are relevant even now. He lauded the role of the Institute of Company Secretaries of India (ICSI) for coming out with a vision “to be a global leader in promoting good corporate governance” and a mission “to develop high calibre professionals facilitating good corporate governance”. He further emphasized that the ICSI should ensure that these objectives do not remain as mere slogans and are achieved in the fullest manner.
He also said that the Company Secretary is not only the conscience keeper of a corporate business enterprise but he/she also has a larger social responsibility. No doubt, Company Secretaries are key managerial personnel, but they also represent internal and external stakeholders and as such, play a pivotal role in ensuring compliances and implementing principles of good corporate governance. He was also emphasized that the Company Secretaries should constantly update themselves with the changes in the laws for proper guidance of the management and other stakeholders. The Hon’ble Vice President of India also stressed that money-laundering through “shell companies” is one of the menaces that affect the economy of a country and he commended the decision of the ICSI to sensitize all its members and other stakeholders on the deleterious impact not only of the shell companies, but also of shell NGO’s.
While, the speech given by the Hon’ble Vice President of India briefly outlines the expectation of the Government and the society on the professional acumen and good ethical values to be perpetrated by the Company Secretaries for good corporate governance, this article will also highlight some of the observations of SEBI about the role of Company Secretaries and also about the role, responsibility and liabilities of Practicing Company Secretaries (PCS’s) by analysing some of the decisions of the Disciplinary Committee (DC) of the ICSI.
It is pertinent to mention that while inaugurating the two-day Golden Jubilee National Conference of Practicing Company Secretaries, on the theme of “PCS – A Value-Driven Professional”, organized by ICSI Mumbai on 18th May 2018, the Chairman of SEBI, Shri Ajay Tyagi pointed out that the Company Secretaries have transformed themselves from secretaries to the board and management, into a key managerial personnel in corporate governance and have made a mark on the corporate landscape by becoming gatekeepers of corporate governance. The said event also discussed and explored utmost adherence to the values of independence, integrity, professional competence and ethical conduct of the role of Company Secretaries. The SEBI Chairman also emphasized that not only shareholders but other stakeholders also become gatekeepers of corporate governance of the company. The SEBI Chairman, however, pointed out that he came across an analysis on secretarial audit standards in companies, which was undertaken by the National Stock Exchange in February 2018 and he was rather disappointed to see that many secretarial audits did not report non-compliances, penalties or compliance of action taken events as pointed out by the stock exchange. Mr. Tyagi, therefore, urged all the Company Secretaries to submit quarterly secretarial audit reports so as to demonstrate commitment and good practices in governance of commercial and financial management of companies.
Mr. Tyagi also spoke on ethics in good corporate governance and said that though all rules and regulations exist, but in the end, it all boils down to good governance. Compliance with regulations and an attitude of integrity has to be developed in operations. A stronger ethical culture will strengthen investors’ faith in the capital market, he said. He also emphasized that the Company Secretary, has been recognized as one of the most important pillars of good governance of all corporates and if the CS discharges his/her duties diligently, the quality of good corporate governance can be brought at par with the best in the world.
In the context of paradigm shift in the provisions of the Companies Act in 2013 and the stringent rules and regulations made thereunder, onerous duties and responsibilities have been cast upon the board of directors, the key managerial personnel including the CFO and CEO and the Company Secretary, to ensure compliances with the provisions of the Companies Act, 2013, as amended from time to time and the other applicable provisions of the related laws and regulations. A new set of guidelines on the appointment and duties of Independent Directors in all listed companies and in certain companies beyond a particular size, have been made with a view that there has to be an independent evaluation of the functioning of the Board of Directors and the executives who are entrusted with the responsibility for following the company decisions and that legal non-compliances, fraudulent practices, diversion of corporate funds to non-eligible legal entities either in the group company or in the promoter’s controlled companies, are pointed out and immediate corrective actions are taken to prevent such mismanagement and misgovernance. However, despite these stringent provisions of the law and the power being exercised by the regulatory authorities, there have been cases after the infamous Satyam scam by scams by companies like Kingfisher Airlines, United Spirits, Ricoh India, Fortis, and Nirav Modi’s companies and many such companies which are coming out of the closet in public domain.
The public at large is sceptical of the intention of the legislative changes and the intent of the regulatory authorities in timely detection and intervention and to take steps by arresting the Directors involved and the CFOs and CEOs who certify the financial statement of companies as per the requirement of the Companies Act, 2013. Instance can be made of the arrest of the CFO of Kingfisher has perhaps not yet sent the right signal to the corporate professionals about having the need to display courage in due diligence and identifying and reporting corporate misdeeds and misgovernance.
Duties and Responsibility of CS and PCS under Companies Act 2013 and Rules
In the context of the duties and responsibilities of the Company Secretaries under the Companies Act, 2013 and the rules made thereunder, some of the important provisions are highlighted hereunder:
Secretarial Audit by PCS
As mandated in Section 204(1) of the Companies Act, 2013 read with Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules 2014, the companies covered under the prescribed threshold limits therein are mandatorily required to get a secretarial audit carried out by a qualified Company Secretary in Practice (PCS) and such secretarial audit report is to be annexed with the Board of Directors’ Report to the shareholders and it has to comply with the format prescribed in Form MR-3, ensuring compliances with the provisions of the Companies Act, the SCRA, the Depositories Act, the Foreign Exchange Management Act, the SEBI Act and Regulations and also to report to compliances of “other laws” as may be applicable to the company concerned.
Secretarial Audit ensures objective evaluation by an independent qualified professional and helps in accomplishing the objectives of the company concerned by evaluating and improving the risk-management, control and governance processes, keeping in view the compliances mandated for the companies. Section 448 of the Companies Act 2013 provides that if any return, report, certificate, financial statement, prospectus, statement or other document required by or for the purposes of any of the provisions of the Act or the Rules made thereunder, any person who makes a statement which is false in material particulars, knowing that it to be false; or which omits any material fact, knowing it to be material, such person shall be liable for punishment under Section 447 which deals with “Punishment for Fraud”.
Complaints Against PCS And Punishment by Disciplinary Commitee
Since the Institute of Company Secretaries of India (ICSI) has a significant role in controlling the conduct of CS, be they in whole-time service or Practicing Company Secretaries (PCS), it becomes necessary to understand the provisions of the Company Secretaries Act, 1980 and the relevant Schedules attached thereto. As per the First Schedule in Part I of the Act which deals with professional misconduct in relation to Company Secretaries in Practice, it stipulates that a PCS shall be deemed to be guilty of professional misconduct in certain areas which basically cover how he/she should practice. Part II of the same First Schedule to the Act elucidates professional conduct in relation to the members of the ICSI in service and it also deems certain misconduct in relation to the Company Secretaries in employment. Part III and Part IV of the said First Schedule deal with professional misconduct in relation to members of the ICSI generally and other misconduct in relation to members of ICSI.
It is only in the Second Schedule to the CS Act, 1980, that Part I thereof stipulates inter-alia, in para 7 that the PCS shall be deemed to be guilty of professional misconduct where he does not exercise due diligence or is grossly negligent in the conduct of his professional duties and fails to obtain sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion. If the PCS fails to invite attention to any material departure from the generally accepted procedure related to the secretarial practice, he/she shall be deemed to be guilty of professional misconduct.
Further, a PCS shall be deemed to be guilty of professional misconduct if he/she fails to disclose a material fact known to him/her in his report/statement but the disclosure of which is necessary in making such report/statement, where he/she is concerned with such report/statement in a professional capacity. Further, it is also stipulated that failure of the PCS to report a material misstatement known to him/her, with which such PCS is concerned in a professional capacity, shall be deemed to be professional misconduct and such PCS can be held guilty.
Similarly in Part II of the Second Schedule of the CS Act, 1980, a member of ICSI, whether in practice or not, shall be deemed to be guilty of professional misconduct if inter-alia, he/she contravenes any of the provisions of the CS Act, 1980 or the regulations made thereunder or the guidelines issued by the ICSI or if such members defalcates or embezzles money received in his/her professional capacity. Part III of the Second Schedule of the CS Act, 1980 stipulates that a member of the ICSI, whether in practice or not, shall be deemed to be guilty of other misconduct, if he/she is held guilty by any civil or criminal court for an offence which is punishable with imprisonment for a term exceeding six months.
The CS Act, 1980 and regulations also prescribe the Procedure for Inquiries in Relation to Misconduct of Members of the ICSI and the provisions of appeal therefrom. It is pertinent to note that a complaint can be made under Section 21 of the Company Secretaries Act, 1980 read with Sub-Rule 4 of Rule 3 of the Company Secretaries (Procedure of Investigation of Professional and Other Misconduct and Conduct of Cases) Rules 2007, against a PCS for not exercising due-diligence or in gross negligence in the conduct of his/her professional duties.
In this regard, it needs to be highlighted that the Disciplinary Committee of the ICSI is conscious of its role in looking into complaints against erring Company Secretaries, be they in service or in practice. Also, as mandated in the CS Act, 1980, an Appellate Authority has also been constituted with retired High Court Judge for considering appeals against the decisions of the Disciplinary Committee of the ICSI. Incidentally, the Disciplinary Committee of the ICSI had, on the basis of complaints received regarding compliance certificate issued by the PCS without exercising due diligence or without complying with the standards and requirements pertaining to compliance certificate, held the PCS liable for professional misconduct. Wherever needed, the Disciplinary Committee has “reprimanded” the erring PCS and also imposed penalty by way of monetary fine. In certain cases, depending on the gravity of the professional misconduct, the Disciplinary Committee had also awarded punishment by way of removal of the name of the concerned PCS from the Register of Members of ICSI for a specified period. These disciplinary proceedings and orders of the Committee act as a deterrent for the PCS and encourages them to be more vigilant and cautious in exercising due diligence while certifying documents for companies.
Such orders of the Disciplinary Committee of the ICSI and its Appellate Authority constituted under the CS Act, 1980, fully demonstrate that the ICSI is committed to ensuring that its members adhere to the ethical code of conduct and exercise abundant caution and due diligence when ensuring/certifying the compliances with the requirements of the law under the Companies Act, 2013 and the rules made thereunder so that a culture of ethical values in corporate governance is not only professed but also seen to be implemented and restored.
Disciplinary Orders of IBBI Against Resolution Professionals
On top of it, the implementation of the Insolvency and Bankruptcy Code, 2016, that has led to the filing of numerous applications before the Adjudicating Authority (National Company Law Tribunal) and the cases coming up before its Appellate Authority (namely, the National Company Law Appellate Tribunal), also reveal how the comfort and cushion enjoyed by the corporate borrowers in remaining in control of the debt-ridden company has been shattered due to the provisions of the Code and the stringent orders passed by the Adjudicating Authority divesting the Board of Directors of such debt-ridden borrower company from exercising control over such company till the time the Resolution Professional appointed by the Adjudicating Authority is involved in finalization and approval of the corporate insolvency resolution process by the Adjudicating Authority. Unfortunately, several orders have recently been passed against Insolvency Resolution Professionals (Incidentally, some members of the ICSI are also qualified Insolvency Resolution Professionals) for indulging in corrupt practices and malpractices in misusing the power entrusted to them under the Insolvency & Bankruptcy Code. Fortunately, the IBBI, i.e., the Insolvency and Bankruptcy Board of India, has been keeping a vigilant eye on the conduct of insolvency professionals and the IBBI has taken action against such identified insolvency professionals.
Strict vigil being exercised by the ICSI as the regulatory body for the profession of Company Secretaries highlights the importance and need for Company Secretaries to adhere to provisions of the Companies Act, 2013 and the Company Secretaries Act, 1980 in maintaining ethics and good governance in the management and affairs of companies and also highlights that failure to comply with such provisions of the said Acts and rules will not only bring disrepute to the ICSI but also to its members. It is felt that from time to time, regular training courses, seminars and workshops be organized so that corporate professionals can be reminded from time to time about the importance of ethics and good governance and the best practices.
 Source: http://pib.nic.in/newsite/PrintRelease.aspx?relid=170844 (“Press Information Bureau , Govt. of India, Vice President’s Secretariat).
 Source: https://www.governancenow.com/news/regular-story/company-secretaries-are-gatekeepers-of-corporate-governance-sebi-chairman (“Company Secretaries are Gatekeepers of Corporate Governance: SEBI Chairman)
Anirrud Goswami, Advocate, Goswami & Goswami, Associates and Advocates,