Tighter norms for honchos

Move to make those with management control more accountable

The government plans to tighten norms to fix responsibility on employees with significant stake in a company.

The concept paper on overhauling the Companies Act, 1956, prepared by the ministry of company affairs, has said any employee drawing higher remuneration than the managing director or a whole-time director and holding over 2 per cent equity will be considered as officer in default.

In addition, holdings of his spouse and dependent children will also be accounted for.

"The move is aimed at increasing the accountability of the people, who have the effective control of the company and discourage people from calling shots from behind the scenes without being held responsible for their actions," said Sumesh Sahni, partner at law firm Amarchand Mangaldas.

The proposed norm, however, could also backfire as it might lead to employees not involved in the actual running of a company coming under the scanner, Institute of Chartered Accountants of India's former council member Vinod Jain said. He added that a 2 per cent limit should be hiked.

The concept paper also proposes to fix responsibility on share transfer agents, bankers, registrars to the issue and merchant bankers for violations in issue or transfer of securities.

"This will considerably increase the liability on these agents, as they are covered under the Securities and Exchange Board of India Act also. Overlapping of regulations should be avoided," Sahni said.

He added that including a new category under officer in default could have far reaching implications as they would be liable for offences under statutes of other Acts too. For instance, some provisions under the Income Tax Act make the officers in default as defined in the Companies Act liable for punishment.

At present, managing director, whole-time director, manager, secretary, any person charged with the responsibility of complying with a particular provision by the company board and the person under whose directions the board functions have been defined as officer in default.