Background
The Ministry of Corporate Affairs has issued on August 28, 2020 two notifications in relation to the enforceability of Section 92(3) of the Companies Act ,2013 (hereinafter referred to as "The Act")in respect to the dissemination of the company's Annual Return to its shareholders, which , in a manner of speaking, have set the cat amongst the pigeons. The Notifications have become the inflection point for discussion across the professional fraternity. This exposition is intended to drive home the implications of the changes made , their inappropriateness in the backdrop of the scenario of the present day, the simpler alternatives that could be considered, when companies find themselves struggling to keep the "pot boiling" in terms of their business operations as also in ensuring legal compliances ,in the wake of the most unprecedented pandemic which has virtually brought the Indian Economy on its knees.
The Law relating to the Annual Return prior to August 28. 2020
Without any further ado, let us get down to basics. Section 92(3) of the Act in its original form provided that an extract of the annual return in such form as may be prescribed shall form a part of the Board's Report. The subsection had to be read conjointly with Rule 12(1) of the Companies(Management and Administration)Rules, 2014.The said sub-rule provides that the extract of the annual return has to be provided in Form No.MGT-9.
It is pertinent to note that the Board's Report to the shareholders is drawn up in accordance with the requirements of Section 134 of the Act and it is customary for companies to place the Board's Report along with the audited financial results of the company for consideration by the Board prior to subsequent circulation to the shareholders for their approval at the company's Annual General Meeting(AGM).
It may also be noted that pursuant to sub-section (2) under Section 92, the annual return has to be filed by the company within sixty days from the date of the AGM. In the case of a listed company or an unlisted company with a paid up share capital of rupees ten crore or turnover of rupees fifty crores or more, the return has to be certified by a company secretary in practice (PCS).
Another important aspect that needs to be clarified is that, in departure from the requirements in the 1956 Act which provided for the incorporation in the annual return,data/information as on the date of the AGM, the present Act calls for information to be culled and incorporated in the return as on the date of close of the company's financial year.
Given that the filing of the annual return is a post-AGM event as also the fact that the information to be provided in the extract of the return in MGT-9 had to be culled out of the annual return drawn up in MGT-7, there was some amount of inconsistency in the manner of complying with the requirements of Section 92(3) on the part of companies.As MGT-9 constituted only an extract of MGT-7 which cannot be legally filed at the time of adoption of the Board's report, the considered view was that it would be appropriate to incorporate in MGT-9, information contained in the Annual return for the previous year-the logic being that an extract can be culled out only out of a return which has actually been filed with the Registrar. While this ensured compliance with the requirement of Section 92(3), in reality it made little meaning to the discerning shareholder by way of information as the data provided in MGT-9 did not coincide with the other information provided in the board's report which was in respect of the financial year under review.
Realizing the limitations in the above treatment some companies provided information in MGT-9 for the year under review , holding out a disclaimer in the report to clarify that the information provided in MGT-9 had been extracted out of the annual return in MGT-7 which would be filed subsequent to the conclusion of the AGM.The latter methodology made more sense in that the shareholder was provided in MGT-9with information which was current.
Substitution of Section 92(3) by the Companies (Amendment)Act, 2017
It is pertinent to note that through the Companies (Amendment)Act, 2017 Section 92(3) was fully substituted to read as under:
"Every company shall place a copy of the annual return on the website of the company if any, and web-link for such annual return shall be disclosed in the Board's Report".
For reasons not made known, the substituted version of Section 92(3) was not notified for enforceability until August 28, 2020 with the result that companies have been providing till the financial year 2019-20 information in MGT-9 along with the Board's Report as stipulated under the original version of Section 92(3).
Insert of proviso under Rule 12(1) above-Notification dated August 28, 2020 –Implications of substituted Section 92(3) read with the proviso to Rule 12(1)
Simultaneous with the issue of the notification for applicability of the substituted version of Section 92(3), MCA vide Notification No.GSR 538(E )dated August 28, 2020 has inserted a proviso under Rule 12(1) of the Companies (Management and Administration )Rules, 2014 to read as under:
"Provided that a company shall not be required to attach the extract of the annual return with the Board's report in Form No. MGT.9, in case the web link of such annual return has been disclosed in the Board's report in accordance with sub-section (3) of section 92 of the Companies Act, 2013."
The above insert has been made through the Companies(Management and Administration)Amendment Rules, 2020.
A conjoint reading of the substituted Section 92(3) already notified and the above proviso to Rule 12(1) make it clear that as opposed to the earlier position that existed until August 28, 2020, companies will now have to provide along with the Board's Report a web-link to the annual return in form MGT-7 in their web site where they have one and the web-link details will have to be provided in the Board's report.It is not clear as to what treatment should be adopted by companies which do not have a web site. Can they choose to ignore the requirements of Section 92(3) or would it be expected of them that they shall provide a hard copy of MGT-7 along with the Board's Report. There is no answer to this as we write these lines in the absence of any clarification from MCA.
Can a web-link be provided to an Annual Return which has not been filed?
The immediate fall out of the above two notifications is that companies will have to be ready with their Annual return from the financial year 2020-21 onwards (assuming that by now they have already held their AGMs for the year 2020 and have either filed or are in the process of filing MGT-7 for 2019-20) along with the draft of the Board's report nearer the time of the meeting of the Board at which it adopts the audited financial results along with the draft of the Board's Report.
Readers are aware that listed companies are under compulsion per the listing regulations to disseminate to the Stock Exchanges the audited financial results along with a copy of the Auditor's Report thereon within sixty days from the close of the financial year. This by itself is a tall order and listed companies burn their midnight oil to cope up with the onerous deadline. To add to the already exacting schedule of compliances, MGT- 9 will now have to be drawn up along with the draft of the Board's report so that soon after the board approves of the financial statement and its report , the AGM can be convened which exercise has to be completed by the top one hundred companies within five months from the close of the financial year as opposed to the window of six months provided under the Act. Leaving aside the above rigmarole, the larger question is whether it would be legally in order to provide the web link for the annual return which is in any way due for submission per the Statute within sixty days of the date of the AGM. As per the language used in Section 92(3), the company "shall place a copy of the annual return on the website of the company". This leads to a logical inference that the web-link of MGT-9 provided by the company represents a copy of the annual return already submitted with the concerned Authority. This would be contrary to the law which provides for the return to be filed as stated above within sixty days of the date on which the AGM has been held or ought to have been held under the Statute.
The above leads to a catch -22 situation may perhaps lead to companies resorting, willy-nilly, to the preparation of a provisional annual return for the year which will be displayed in the website. The certification by the PCS will also have to be provisional and while providing the web-link, companies will have to clarify that the annual return shall be filed after the conclusion of the AGM and that the web link had been provided only in compliance with the requirements of Section 92(3). Once the AGM is completed, Form MGT 9 will have to be loaded along with the final certificate from the PCS for submission with the ROC. There would therefore be an unnecessary duplication of the procedure with no significant advantage accruing to the shareholder by way of additional information. Companies that do not have a web site will have to perhaps append a hard copy of MGT-9 along with the Board's Report while classifying it as provisional.
The other alternative to the above is for companies to choose the easier option of providing a web link for the annual return filed for the previous year. This would carry really no meaning where it comes to provision of information to the shareholders.
It is submitted that neither of the alternatives discussed above will answer in full measure the mandate carved out by the provisions of Section 92(3) as notified from August 28, 2020.
In so far as those companies which are still struggling to finalize their audited financial results for the year 2019-20 as also meet the deadline of holding the AGM by September 30 on account of the problems caused by the pandemic are concerned, their woes will compound further in that they will have to ensure compliance with the requirements of the substituted version of Section 92(3).
Thus the notification enforcing the applicability of the substituted version of Section 92(3) and the insert of the proviso under Rule 12(1) of the Companies (Management and Administration )Rules, 2014 will not in any way mitigate the imperfections, if any, in the original version of Section 92(3).If anything the problems of compliance will get exaggerated further as elucidated above. Thus if the original requirement of providing an extract of the Annual Return in MGT-9 could by itself be termed as an aberration, the enforcement of the reincarnated version of section 92(3) does not in any way lift the cobwebs of doubt as regards the manner of ensuring compliance. If anything, it only accentuates the problem. Thus two wrongs really do not lead to a right as the oft-repeated Adage goes.
Alternatives that could be considered by MCA
What could be the alternatives that could be worked out to simplify the process to ensure that the shareholders are able to access the company's annual return .process.It is humbly submitted that one alternative that could be considered is that Section 92(3)read with Rule 12(1) may be amended to provide that a copy of the MGT 7 shall be hosted on the web site immediately after the same is filed with the ROC along with a copy of the certification in MGT-8 upon conclusion of the AGM.
Companies could also be made to make a public announcement in confirmation that MGT-7 has been filed within the stipulated timelines and that the same may be accessed at the company's web site.
For companies that do not have a web site, the requirement of providing a hard copy of MGT-7 with the Board's Report, as apprehended in many quarters may be dispensed with altogether.
The third alternative could be that the voluminous nature of data/information that has to be incorporated in MGT-7 could be pruned such that at least there is the avoidance of duplication of information provided in other sections of the company's financial statements such as in the Report on Corporate Governance.
To conclude, MCA has stirred the hornet's nest by activating Section 92(3) which was in a state of hibernation for over three years. The call of the hour is to ease the procedure for doing business. There is little advantage to be derived by drowning the shareholder in an avalanche of information, most of it would be available from other sources.
Our humble submission is that let not the powers that be, continually tinker with the law and add to the already daunting quantum of procedural compliances, lest it should end up as the last straw which broke the proverbial camel's back.
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