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Needless ritual?

S. Murlidharan

ARE the annual accounts of a company, required to be placed before the annual general meeting (AGM) of a company in terms of Section 210 of the Companies Act, 1956, further required to be passed by the shareholders thereat? It may be noted that all that Section 210 asks of the board of directors is to lay before the company a balance-sheet as at the end of the financial year as well as the profit and loss account for the financial year. Of course, the shareholders would have had access to annual account s as well as to the auditor's report thereon at least 21 days prior to the date of the AGM.

What is the purpose of `laying' before the members at the AGM the annual accounts? Trite as the question may sound, there is no convincing answer. There is no requirement under any provision of the Companies Act to get the accounts approved by the shareh olders at the AGM. Section 220 of the Companies Act calls upon a company to file with the Registrar three copies of the accounts within 30 days of the AGM or within 30 days of the last date by which the AGM should have been held. The mandate of Section 2 20 is not to file with the Registrar the accounts approved by the shareholders but the one laid before a company at an AGM. There is, however, a hoary practice of passing a resolution akin to the following at AGMs:

``Resolved that the audited balance sheet as at...and the profit and loss account for the year ending...together with the auditors' report thereon and the directors' report be and the same are hereby received and adopted.''

Is this a needless ritual given the fact that the law nowhere requires the shareholders' stamp of approval to the annual accounts? The practice may be traced to Section 173, which lists ``consideration of the accounts, balance-sheet and the reports of th e board of directors and auditors'' as one of the four items of ordinary business at an AGM.

It may be noted that Section 173, while pigeonholing consideration of accounts as an ordinary item of business, does not go on to mandate passing of resolution approving such accounts. In the event, the upshot is that while accounts must be laid before t he AGM, it need not meet with the approval of the shareholders. This position of the law is a trifle strange. The accounts are prepared by the directors and the auditors' report on the accounts, to the extent critical or adverse, is in a way a censure of the board. Yet, shareholders' approval or disapproval has not been deemed necessary by Parliament.

In fact, as far as accounts are concerned, the only approval required is that of the board of directors; it should, according to Section 215(3), approve the accounts before they are signed on its behalf and before they are submitted to the auditors for t heir report thereon. If there are two dominant shareholders in a company, the occasion to go for the jugular is the board meeting at which the accounts are going to be approved. Any laxity here would mean the accounts going through unless a company stick s its neck out and calls upon the shareholders to adopt the accounts.

But then, at the AGM all that the rival group can possibly do is to embarrass its rival by managing a rebuke which refusal to adopt the accounts may amount to. This hardly matters. In the final analysis, the accounts which go to the Registrar's office is the one laid before the AGM. Whether such accounts have met with the approval of the shareholders is of no consequence under the existing scheme of things. This is to marginalise the shareholders if not an affront to them. To keep the members away from approval of accounts is to make a farce of shareholders' democracy.

Cynics have it that the real showdowns and flexing of muscles take place in the quiet and cloistered board rooms and that what happens at general meetings is only a formality or at best a tamasha and one, therefore, need not get unduly perturbed about th is. But this misses the point. If this is accepted, then everything can be decided and done at the board meetings themselves given the fact that normally the board reflects the respective strengths of the gladiators.