Category: Companies Act 2013

Whether SFIO needs to complete the investigation within the time specified by the Central Govt.?

The Apex Court held that the period that the Central Govt. may prescribe to complete investigation u/s.212(3) is directory and no fixed period is provided for completion of investigation by SFIO; transfer of investigation by other agencies to SFIO u/s.212(2) of the Companies Act 2013 is irrevocable; when accused is directed to remand by a competent court in exercise of judicial function then the same cannot be challenged by writ of habeas corpus; and about territorial jurisdiction of High Court held that even if the arrests were effected within the jurisdiction of the High Court, since the accused were produced before a competent court in pursuance of Sections 435, 436 of the Companies Act 2013, the High Court ought not to have entertained the writ petition.

Hon’ble Supreme Court in  SFIO vs. Rahul Modi and Another etc. 2019 SCC OnLine SC 423 vide judgement dt. 27/03/2019:

Factual matrix:

a) The investigation into the affairs of Adarsh Group of Companies and LLPs was assigned by the Central Government to SFIO vide Order dated 20.6.2018, per section 212(1)(c) of the Companies Act, 2013. This Order did stipulate in para 6 that the Inspectors should complete their investigation and submit their report to the Central Government within three months.

b) On 20.6.2018 itself, the Director, SFIO appointed investigating officers.

c) The period of three months expired on 19.09.2018. However, the investigation was not over.

d) The proposal to arrest three accused persons was placed by the Investigating Officers before the Director, SFIO and after being satisfied in terms of requirements of Section 212(8) of 2013 Act approval was granted by Director, SFIO on 10.12.2018.

e) After they were arrested on 10.12.2018, the accused were produced before the Judicial Magistrate, Gurugram, Haryana, who by his order dated 11.12.2018 remanded them to custody till 14.12.2018 and also directed that they be produced before the Special Court, Gurugram on 14.12.2018.

f) On 13.12.2018 a proposal seeking extension of time for completing investigation in respect of 57 cases including the present case was preferred by SFIO before the Central Government.

g) On 14.12.2018 the Special Court, Gurugram remanded the accused to custody till 18.12.2018.

h) On the same date i.e. on 14.12.2018 the proposal for extension was accepted by the Central Government in respect of the Group and extension was granted upto 30.06.2019.

i) On 17.12.2018 the Writ Petitions were preferred, inter alia, seeking prayer of writ of habeas corpus, which came up for the first time before the High Court of Delhi on 18.12.2018.

j) On 18.12.2018 itself the accused were further remanded to police custody till 21.12.2018 by the Special Court, Gurugram.

k) On 20.12.2018 Hon’ble High Court at Delhi issued notice returnable on 31.1.2019 and proceeded to consider ad interim relief for immediate release of the accused. It held arrest as illegal detention which cannot be sanctified by subsequent remand orders passed by the concerned Magistrate. And pursuant to said order, the original Writ Petitioners were released on bail. This ad interim relief was challenged by the SFIO before Hon’ble Supreme Court in the present case.

  1. Whether the the date with reference to which the legality of detention can be challenged in a Habeas Corpus proceeding is the date on which the return is filed in such proceedings and not with reference to the initiation of the proceedings?

Held yes, as decided by the Federal Court in Basanta Chandra Ghose vs. King Emperor (1945)7 FCR 81. Similar question was considered in Kanu Sanyal vs. District Magistrate, Darjeeling and Others (1974) 4 SCC 141. The law is thus clear that “in Habeas Corpus proceedings a Court is to have regard to the legality or otherwise of the detention at the time of the return and not with reference to the institution of the proceedings”.

Hon’ble Supreme Court also considered its recent decision of division bench in Manubhai Ratilal Patel through Ushaben vs. State of Gujarat and others (2013) 1 SCC 314; in Saurabh Kumar vs. Jailor, Koneila Jail and another (2014) 13 SCC 436 and a bench of three learned judges in State of Maharashtra and Others vs. Tasneem Rizwan Siddiquee (2018) 9 SCC 745 and held that act of directing remand of an accused is thus held to be a judicial function and the challenge to the order of remand is not to be entertained in a habeas corpus petition.

  1. Whether Delhi High Court have territorial Jurisdiction?

Section 435 of the Companies Act 2013 contemplates establishment of Special Courts for the purpose of providing speedy trial of offences under the said Act. Section 436 then provides that “offences specified under sub-section (1) of Section 435 shall be triable only by Special Court established or designated for the area in which the Registered Office of the Company, in relation to which the offence is committed ……”. Soon after the arrest, the accused were produced before the Judicial Magistrate, Gurugram and then before the Special Court, Gurugram. Special Court, Gurugram would be competent to deal with the matter in terms of Section 436.

However, Learned counsel for the writ petitioners, however, contend that since the accused were arrested in Delhi, were kept in custody in Delhi, and the SFIO office being in Delhi, the High Court of Delhi was competent to entertain and consider the writ petitions so preferred by the writ petitioners. Reliance was placed by them on the decision of this Court in Navinchandra N. Majithia v. State of Maharashtra and others (2000) 7 SCC 640.

However, the Apex Court found that the judgement in Navinchandra Majithia, was not dealing with the matter.  And it relied upon Dashrath Rupsingh Radhod vs. State of Maharashtra and another (2014) 9 SCC 129 and found that “It is true that the decision in Dashrath Rupsingh Radhod 15 was in the context of a criminal complaint under Section 138 of the Negotiable Instruments Act and not while dealing with an issue of maintainability of a writ petition under Article 226 of the Constitution. It cannot, therefore, be said that in the present case, the High Court completely lacked jurisdiction to entertain the petition. However, since the challenge was with respect to the detention pursuant to valid remand orders passed by the Judicial Magistrate and the Special Court, Gurugram, in our considered view, the High Court should not have entertained the challenge. If the act of directing remand is fundamentally a judicial function, correctness or validity of such orders could, if at all, be tested in a properly instituted proceedings before the appellate or revisional forum. In the circumstances even if the arrests were effected within the jurisdiction of the High Court, since the accused were produced before a competent court in pursuance of Sections 435, 436 of 2013 Act, the High Court ought not to have entertained the writ petition. “

  1. The period within which an investigation report is contemplated to be submitted to the Central Govt. u/s.212(3) is mandatory or directory? And where the initial Order of arrest itself was invalid then can such illegality be sanctified by subsequent Order of remand?

Under sub-Section (3) where the investigation is so assigned by the Central Government to SFIO, the investigation must be conducted in the manner and in accordance with the procedure provided in the Chapter and a report has to be submitted to the Central Government within such period as may be specified. This provision contemplates submission of a report within the period as may be specified. The subsequent provisions then contemplate various stages of investigation including arrest under sub-Section (8) and that SFIO is to submit an interim report to the Central Government, if it is so directed under sub Section (11). Further, according to sub-Section (12), on completion of the investigation, SFIO is to submit the “investigation report” to the Central Government. This report under sub-Section (12) may lead to further follow up actions. Under sub-Section (13) a copy of the “investigation report” could be obtained by any concerned person by making an application in that behalf to the Court while under sub-Section (14) on receipt of said “investigation report” the Central Government may direct SFIO to initiate prosecution against the Company. And the provisions of Section 43(2) of the Limited Liability Partnership Act, 2008 do not postulate any such period. Hon’ble Apex Court finds that Section 212(3) of 2013 Act by itself does not lay down any fixed period within which the report has to be submitted. Even under sub-Section (12) which is regarding “investigation report”, again there is no stipulation of any period. In fact such a report under sub-Section (12) is to be submitted “on completion of the investigation”. There is no stipulation of any fixed period for completion of investigation which is consistent with normal principles under the general law. For instance, there is no fixed period within which the investigation under Criminal Procedure Code must be completed.

Again, sub-Section (2) of Section 213 of 2013 Act does not speak of any period for which the other Investigating Agencies are to hold their hands, nor does the provision speak of any re-transfer of the relevant documents and records from SFIO back to said Investigating Agencies after any period or occurring of an event (unlike Section 7 of the National Investigation Agency Act, 2008). The idea under sub-Section (2) is complete transfer of investigation. The transfer under sub-Section (2) of Section 213 would not stand revoked or recalled in any contingency.

“It is well settled that while laying down a particular procedure if no negative or adverse consequences are contemplated for non-adherence to such procedure, the relevant provision is normally not taken to be mandatory and is considered to be purely directory. Furthermore, the provision has to be seen in the context in which it occurs in the Statute. There are three basic features which are present in this matter:-

1. Absolute transfer of investigation in terms of Section 212(2) of 2013 Act in favour of SFIO and upon such transfer all documents and records are required to be transferred to SFIO by every other Investigating Agency.

2. For completion of investigation, sub-Section (12) of Section 212 does not contemplate any period.

3. Under sub-Section (11) of Section 212 there could be interim reports as and when directed.”

And held that In the absence of any clear stipulation an interpretation that with the expiry of the period, the mandate in favour of SFIO must come to an end, will cause great violence to the scheme of legislation. If such interpretation is accepted, with the transfer of investigation in terms of sub Section (2) of Section 212 the original Investigating Agencies would be denuded of power to investigate and with the expiry of mandate SFIO would also be powerless which would lead to an incongruous situation that serious frauds would remain beyond investigation. That could never have been the idea. The only construction which is, possible therefore, is that the prescription of period within which a report has to be submitted to the Central Government under sub-Section (3) of Section 212 is purely directory.

And further held that therefore it cannot be said that in the instant case the mandate came to an end on 19.09.2018 and the arrest effected on 10.12.2018 under the orders passed by Director, SFIO was in any way illegal or unauthorised by law.

Companies (Restriction on number of layers) Rules, 2017

Indian Companies can have only two layers of subsidiaries under the Companies Act 2013, with the government putting in place stricter norms as it continues with the clampdown on illicit fund flows.

The Companies (Restriction on number of layers) Rules, 2017, notified (G.S.R. 1176(E)) by Central Government, came into effect from 20th September 2017.

  1. Meaning of Layers of Subsidiary

The Rules has not defined layers of subsidiaries. As per explanation (d) to Section 2(87) which defines ‘subsidiary’, layer in relation to a holding company means its subsidiary(ies).

As per the Rules, the following are not to be considered as layers of subsidiaries.

  • One layer which consist of one or more wholly owned subsidiary(ies) shall not be taken for computing the numbers of layers.

                            

For instance:

  1. One Layer of Wholly Owned Subsidiary (WOS)

One Layer:

XYZ Ltd is holding 100% equity of A Ltd, B Ltd, C Ltd and D Ltd. Layer one consists of 4 Wholly Owned Subsidiaries, which shall not be included for computation of layers

  • The provisions of the Rules are not in derogation of the proviso to sub-section (1) of section 186 of the Companies Act, 2013 i.e.
  1. A company can acquire any other foreign company ( a company incorporated outside India), where such foreign company has investment subsidiaries beyond two layers as per law of such country.
  2. A subsidiary company may have any investment subsidiary for the purposes of meeting requirements under any law or under any rule or regulation.
  • Section 186 (1) of the Act provides that if a company invests through layers of companies, then such number of layers for making investments shall not exceed two layers.

 

  1. Companies who already have more than 2 layers of subsidiaries

While the Rules are applicable prospectively, companies that already have more than two layers of subsidiaries have to furnish details to the Registrar of Companies (ROC).

  1. Need to file CLR-1 with the ROC within 150 days (i.e. by 17th February 2018) disclosing the details of layers of subsidiaries.
  2. Not allowed to have the additional layer of subsidiaries over and above the layers existing as on 20th September 2017.
  • Once the one or more layers are subsequently reduced (post 20th September 2017), then the Company shall not add number of layers of subsidiaries beyond the permitted layers after such reduction.

There is no provision upto what time such companies can continue to have more layers of subsidiaries than two permitted layers. Hence, it seems that they can continue until so required by them.

 

  1. Companies acquiring /creating subsidiary(ies) on or after 20th September 2017.

 

3.1 INDIAN COMPANY

A company acquiring/creating any other Indian company as its subsidiary cannot have more than two layers of subsidiaries.

  • For calculating two layers of subsidiaries, holding company need to check how many layers of subsidiaries it already has.
  • Secondly, check whether holding company could further acquire any of the India company.

 

For Instance:-

  • When a Company already have subsidiaries before enforcement of these rules

B Ltd is wholly owned subsidiary of A Ltd. And C Ltd is a subsidiary of B Ltd. And D Ltd is a subsidiary of C Ltd.

NOTE: B Ltd is wholly owned subsidiary of A Ltd. Hence, it’s not treated as layer one. B Ltd is a holding company of C Ltd and hence A Ltd is the ultimate holding company of C Ltd. This will be treated as the first layer.

C Ltd is the holding company of D Ltd and hence A Ltd is the ultimate holding company of D Ltd. This will be treated as the second layer.

  • A Ltd already owns two layers of subsidiaries, hence further it can’t acquire/create any more of layers of subsidiaries below D Ltd. The restriction on A Ltd also prohibits C Ltd[1] from creating/acquiring subsidiary below it. This is so because if C Ltd which is having only one layer of subsidiary D Ltd, if it acquires/creates subsidiary below D Ltd, it will consequently have the effect of having the third layer of a subsidiary for A Ltd.
  • However, A Ltd can acquire/create another subsidiary (not below D Ltd) either directly below it or below C Ltd.

 

3.2 Foreign Company

A company acquiring a foreign company ( a company incorporated outside India) can have subsidiaries beyond two layers as per the laws of such country.

 

Instance:

  • A Ltd is an Indian holding company of B Inc (foreign company) – this is layer 1
  • B Inc is holding company of C Inc (foreign company) – this is layer 2
  • C Inc is holding company of D Inc (foreign company) – this is layer 2

In the above example, A Ltd acquires and becomes holding company of B Inc (foreign company), which is having two layers of subsidiary (C Inc and D Inc) and the law of the country where B Inc is incorporated permits such layers of subsidiaries. A Ltd thus becomes an ultimate holding company of C Inc. and D Inc. Thus, in such a case, Indian company may have more than two layers of subsidiaries.

  • After the acquisition of a foreign company, an Indian company is not required to file any information on layers of subsidiaries with ROC as per the Rules.

 

  1. Penalty for non-compliance

If any company contravenes any provision of the Rules, the company and every officer of the company who is in default shall be punishable with fine UPTO Rs. 10,000/- and where the contravention is a continuing one, with a further fine UPTO Rs.1000/- for every day after the first during which such contravention continues.

Amount of penalty is similar to prescribed under section 450 of the Act which prescribes the general amount of penalty where no penal amount for contravention of any provisions of the Act is specified.

Amount of penalty is discretionary and can be adjudicated by ROC u/s.454 of the Act. The offence of non-compliance with the Rules is compoundable u/s.441 of the Act.

[1] due to explanation (a) under section 2(87) of the Companies Act 2013

 

Transition from High Court to NCLT, compromise, arrangement, winding-up and other matters

The Insolvency and Bankruptcy Code, 2016 (31 of 2016)

 

Key words of Preamble to the Insolvency and Bankruptcy Code, 2016 (IBC):-

  • reorganization and insolvency resolution of- corporate person, partnership firms and individuals

– in a time bound manner

  • for maximization of value of assets
  • to promote entrepreneurship

  • availability of credit

  • balance the interest of all the stakeholders (including alteration in the order of priority of payment of Government dues)

  • to establish an Insolvency and Bankruptcy Board of India (IBB or IBBI)

 

What happened and when:

 

Date What
28/5/2016 IBC notified
05/08/2016 IBB related provisions notified
19/08/2016 Provisions empowering CG notified
29/08/2016 Salary Rules notified
01/10/2016 IBB established with office at New Delhi

Mr. M. S. Sahoo Chairperson

Ex-officio of Ministry of Finance, Ministry of Corporate Affairs, Ministry of Law and Justice and the Reserve Bank of India notified

01/11/2016 Provisions empowering IBB notified.

Also, Schedules to IBC notified – change in Central Excise, Service Tax, SICA

15/11/2016 Regulations for IPA and IP notified

Also, Schedules to IBC notified – change in SARFAESI, LLP Act 2008, Companies Act 2013, Payment and Settlement Systems Act, 2007

21/11/2016 IBBI (IPA) Regulations 2016 notified w.e.f. 21/11/2016
23/11/2016 IBBI (IP) Regulations 2016 notified w.e.f. 29/11/2016
30/11/2016 Ss. 4 to 32 – Provisions relating to Insolvency Resolution Process for Corporate Persons notified w.e.f. 01/12/2016

S. 236 Offences under IBC, triable by Special Court under CA 2013 – notified w.e.f. 01/12/2016

S.237 IBC overrides all other laws – notified w.e.f. 01/12/2016

S.231 No injunction notified w.e.f. 01/12/2016

S.239(2)(a) to (f) – CG to make Rules for application to NCLT

IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 notified w.e.f. 01/12/2016

01/12/2016 Ss. 4 to 32 of IBC notified (except for individuals, partnership firm and voluntary liquidation)

S. 60 transitory – for Court to NCLT for Personal Guarantor

01/12/2016 IB (Application to Adjudicating Authorities) Rules, 2016 notified

For filing applications u/s.7,8,9 of IBC

   

 

 

The Insolvency and Bankruptcy Code, 2016 (the ‘IBC’).

 

As you might be aware that the Government of India has notified the substantive provisions of the IBC with effect from 01 December 2016. The Government has also issued notifications for repeal of the Sick Industrial Companies (Special Provisions) Act, 1985 (the ‘SICA’). Thus, SICA is repealed with effect from 01st December 2016 and all proceedings, reference, inquiry or appeal before BIFR and AAIFR stands abated with effect from 01st December 2016.

 

Further with effect from 01st December, 2016, all matters relating to winding-up (except voluntary winding-up) of Companies and Limited Liability Partnerships (LLPs) are dealt with by the NCLT. Thus, High Courts (and in some part of the Country District Courts) do not have jurisdiction for dealing with new cases of winding-up on and after 01 December 2016. Cases of Voluntary winding-up to be dealt with by the NCLT on and after 01 April 2017.

 

Further, with effect from 15th December, 2016, cases relating to compromise, arrangement and reconstruction (including merger, amalgamation and demerger), reduction of share capital, variation of shareholder’s rights, recovery of property of company in wrongful possession of employees or ex-employees of Company etc. would be dealt with exclusively by the NCLT.

 

To have birds eye view of the transitory provisions for transfer of cases from High Courts to the NCLT, a tabular presentation is given below:

 

TRANSITORY PROVISIONS

 

The Insolvency and Bankruptcy Code, 2016 (the ‘IBC’).

National Company Law Tribunal (NCLT).

 

Section 434 (1) (c) of the Companies Act 2013 – as amended by Eleventh Schedule of IBC and further amendment by Order S.O. 3676(E) dated 7th December 2016.

 

Subject Matter Transferred to NCLT Retained with High Court
Winding-up under supervision of Court No. Yes.
Voluntary winding-up (Sec.484 of CA 1956)

(Rule 4)

No.

New cases to be filed with NCLT w.e.f. 01 April, 2017 as per the IBC.

Note that provisions relating to voluntary winding-up under the Companies Act, 2013 are omitted by the IBC.

 

Yes, for cases filed upto 31st March 2017.
Winding-up for inability to pay (Sec. 433(e) of CA 1956)

(Rule 5)

Yes, where petition has not been served on the Respondent.

Such petition to be treated as application u/Ss. 7, 8 or 9 of IBC.

Petitioner to submit additional information, including proposed insolvency professional, within 60 days from date of notification of the Rules on 07 December 2016. Thus, by 05 February, 2017. Failing which petition shall abate.

Yes, where petition has been served on the Respondent
Winding-up by Court

[Sec. 433(a) and (f)]

(Rule 6)

Only those cases where the petition has not been served on the respondent. Yes, where the petition has been served on the respondent.
BIFR u/s.20 of SICA

[S. 434(1)(d) of CA 2013 r/w Rule 5(2)]

w.e.f. 01/12/2016 Sick Industrial Companies (Special Provisions) Repeal Act, 2003 brought to force, including section 4(b) thereof.

No.

 

Proceedings before BIFR and AAIFR abates.

However, reference within 180 days can be made to NCLT as per Companies Act 2013.

Yes, where opinion has been forwarded by BIFR and no appeal is pending and winding up is initiated u/s. 20 of SICA.
Arbitration, Compromise, arrangement and reconstruction

(Second proviso to Section 434(1)(c) of CA 2013 read with Rule 3)

Yes, except those cases reserved for orders for allowing or otherwise, i.e. final disposal (cases heard but orders reserved) w.e.f. 15th December, 2016 Those cases reserved for orders for allowing or otherwise (Cases heard and pronouncement of order is pending or reserved) w.e.f. 15th December, 2016
Reduction of Capital (Sec. 100 of CA 1956 – corresponding Sec. 66 of CA 2013) As above As above
Cancellation or variation of rights of shareholders (Sec. 106 of CA 1956  –corresponding sec. 48(1) of CA 2013) As above As above
To restrain fraudulent persons from managing companies (Sec. 203 of CA 1956) As above As above
For order that affairs of a Company ought to be investigated (Sec. 237 of CA 1956 – corresponding sec. 213 of CA 2013) As above As above
Applications under section 439 for the winding-up of a company, or under section 583 for the winding up of an unregistered company, or under section 584 for the winding-up of a foreign company

(Corresponding Sec.376 of CA 2013)

As above As above
Applications for a declaration under section 542 (XI Schedule) in the course of proceedings under section 397 or 398 that a person who was knowingly a party to carrying on business in a fraudulent manner shall be personally liable for all or any of the debts or other liabilities of the company

(Corresponding Sec.339 of CA 2013)

As above As above
Applications by a creditor or member under section 543 (XI Schedule) in the course of proceedings under section 397 or 398, to enquire into the conduct of any of the persons mentioned in section 543 (XI Schedule) and compel him to repay or restore any money or property to the company or pay compensation.

(Corresponding Sec.340 of CA 2013)

As above As above
Applications under section 633(2) by an officer of a company for relief.

(Corresponding Sec.463 of CA 2013)

As above As above
Applications under section 560(6) to restore a company’s name to the Register of Companies

(Corresponding Sec.248 of CA 2013 – does not contain similar provision)

As above As above
Applications under section 579 to confirm the alteration in the form of the constitution of a company by substituting a memorandum and articles for a deed of settlement.

(No corresponding provision under CA 2013)

As above As above

 

All proceedings transferred from High Court to NCLT, to be dealt with as per the Companies Act, 1956 and the Company (Court) Rules, 1959. [Third proviso to Section 434(1)(c) of the Companies Act 2013].

All proceedings transferred from High Court to NCLT, to be dealt with from the same stage as were before their transfer. [Section 434(1)(c) of the Companies Act 2013].

Companies Amendment Bill 2016: Analysis

An attempt is made to present an analysis of the Companies Amendment Bill, 2016.

Posting analysis of definitions only. Analysis on other provisions would be posted in staggering mode.

CLC = Companies Law Committee of Ministry of Corporate Affairs (MCA) which submitted its report in February 2016.

LODR = Securities and Exchange Board (Listing Obligations and Disclosure Requirements) Regulations, 2015.

After taking into consideration suggestions made by a high level panel on further possible changes to the law, the government came up with the Bill as part of larger efforts to address difficulties faced by stakeholders and improve the the ease of doing business in the country.

Lok Sabha Speaker Sumitra Mahajan has referred the Bill to the Standing Committee on Finance, which is chaired by senior Congress leader Veerappa Moily.

The Speaker has referred the Companies (Amendment) Bill, 2016, as introduced in the Lok Sabha to the Standing Committee on Finance for examination and report within three months, according to intimation published in Bulletin-Part II, dated 12 April, 2016, vide para No. 3288.

Thus, relaxations (inter alia private placement process, remove restrictions on layers of subsidiaries and investment companies, amend CSR (Corporate Social Responsibility) provisions to bring greater clarity and exempt certain class of foreign entities from the compliance regime under this law.) to Corporate is deferred for atleast 3 months. It also results in further delay in formation of National Company Law Tribunal (NCLT) and Appellate Tribunal (NCLAT) which will transfer powers of High Court in relation to winding-up and compromise or arrangements to NCLT. Also proceedings before BIFR / AAIFR would abate. Thus, large part of Companies Act 2013 would not be brought to force until the Bill is enacted by Parliament.

PROVISIONS UNDER COMPANIES (Amendment) Bill, 2016 PROVISIONS UNDER COMPANIES ACT,2013 Remarks
Section 2(6) Associate Company

Explanation.—For the purpose of this clause—

(a) the expression “significant influence” means control of at least twenty per cent. of total voting power, or control of or participation in business decisions under an agreement;

(b) the expression “joint venture” means a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement;

Section 2(6)

In relation to another company, means a company in which the other company has a significant influence, but is not a subsidiary company of the company having such influence, and includes a joint venture company.

Explanation-For the purpose of this clause “significant influence” means control of at least twenty percent of total share capital or business decisions under an agreement;

It may be noted that the term “total share capital” has been defined in Rule 2(1) (r) of the Companies (Specification of Definitions Details) Rules, 2014, to mean the aggregate of (a) paid-up equity share capital; and (b) convertible preference share capital.

 

 

Amendment is as per recommendation of the CLC.

 

To ascertain whether a company is associate or not, determining factor would be total voting power instead of total share capital.

 

It may be noted that LODR also refers to definition of ‘associate’ as under Companies Act or accounting standards.

 

The term “joint venture” is now defined and is in line with Indian Accounting Standard 28 on Investments in Associates and Joint Ventures.

 

However, the terms ‘associate’ and ‘significant influence’ under the Companies Act and Indian Accounting Standards continue to differ.

 

 

Section 2(28)

“Cost Accountant” means a cost accountant as defined in clause (b) of sub-section (1) of section 2 of the Cost and Works Accountant Act, 1959 and who holds a valid certificate of practice under sub-section (1) of section 6 of that Act

Section 2(28)

“cost accountant” means a cost accountant as defined in clause (b) of sub-section (1) of section 2 of the Cost and Works Accountant Act ,1959 (23 of1959)

Term Cost Accountant wherever appears in Companies Act has been assigned meaning of Practising Cost Accountant.
Section 2(30) Debenture

ADDITION: “Provided that-

(a)   The instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934;and

(b)   Such other instrument as may be prescribed by the Central Government in consultation with Reserve Bank of India, issued by a company,

Shall not be treated as Debenture.”

Amendment is as per recommendation of the CLC.

Certain instruments like commercial papers and other money market instruments, which are often used as an important short-term fund raising source by eligible companies; and are well regulated under RBI regulations.

MCA had recognizing this, had clarified that Commercial Papers and similar instruments if issued as per guidelines of RBI would not attract debentures related provision under Rule 18 of the Companies (Share Capital and Debenture) Rules, 2014.

 

Now, the Bill provides to exclude all instruments specified in Chapter III-D of RBI Act 1934 from the definition of ‘Debenture’. Thus, money market instruments (which includes call or notice money, term money, repo, reverse repo, certificate of deposit, commercial usance bill, commercial paper and such other debt instrument of original or initial maturity up to one year as may be specified by RBI from time to time),  derivatives, repo, reverse repo.

 

The Bill also authorizes MCA to exclude other instruments also from the purview of Debenture in consultation with RBI.

It is not clear whether Bonds of Central Government, State Government and local bodies would be outside the purview of ‘debenture’.

Section 2(41) Financial Year

In the first proviso, after the word “subsidiary” the words “or associate company” shall be inserted.

Amendment is as per recommendation of the CLC.

 

An associate company of a foreign company may follow different financial year (other than 01 April to 31 March) if it is required to follow different financial year for consolidation of its accounts outside India. And for this purpose it need to approach National Company Law Tribunal.

 

Section 2(46) Holding Company

the following Explanation shall be inserted, namely:—

‘Explanation.—For the purposes of this clause, the expression “company” includes any body corporate;’

Amendment is as per recommendation of the CLC.

 

While foreign company is treated as subsidiary company for the purpose of Companies Act 2013 but similar provision for holding company was not present. This anomaly is now being rectified.

 

With the new explanation, a company incorporated outside India could be considered to be the holding company of another company, for the purpose of the Companies Act 2013.

 

Section 2(49)

omitted

Section 2(49)

“interested director” means a director who is in any way, whether by himself or through any of his relatives or firm, body corporate or other association of individuals in which he is or any of the relatives is a partner, director or member, interested in a contract or arrangement, or proposed contact or arrangement, entered into or to be entered into by or on behalf of a company.

Amendment is as per recommendation of the CLC.

Definition of the term ‘interested director’ is being omitted.

The only reference to the term ‘interested director’ in the Act was in Section 174 (3) (relating to quorum at Board meeting), and an Explanation to that provision clarified that the meaning of the term ‘interested director’ would be the same as for the purposes of Section 184 (2).

And Section 184 (2) provides nature of interests to be disclosed by directors, but does not use the phrase ‘interested director’.

 

However, despite omission of the definition, no change in effect from governance or legal perspective would be on Directors, as wordings of section 184 are similar to erstwhile definition of interested director u/s.2(49).

Section 2(51) (iv)

The word “and” shall be omitted AND

The following shall be substituted-

“(v) such officer, not more than one level below the directors who is in whole-time employment, designated as Key managerial personnel by the Board; and

(vi) such other officer as may be prescribed”

Section 2(51)

“key managerial personnel”, in relation to a company, means—

(i) the Chief Executive Officer or the managing director or the manager;

(ii) the company secretary;

(iii) the whole-time director;

(iv) the Chief Financial Officer; and

(v) such other officer as may be prescribed;

Amendment is as per recommendation of the CLC.

 

The J.J. Irani Committee observed that “stakeholders / Board look towards certain key managerial personnel for formulation and execution of policies.”

The definition of KMP is now being modified to give flexibility to the Board of Companies to designate its whole time officers, who are one level below the directors, as KMP.

 

 

 

 

 

 

 

 

 

Section 2(57) Net worth

For the words “and securities premium account”, the words “,securities premium account and debit or credit balance of profit and loss account,” shall be substituted

Section 2(57)

“net worth” means the aggregate value of the paid up share capital and free reserves created out of profits and securities premium account, after deducting the aggregate value of accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of assets, written back of depreciation and amalgamation;

Amendment is as per recommendation of the CLC.

 

An obvious error in the definition is being recified.

Section 2(71)

In sub-clause (a) after the word “company”, the word “and” shall be inserted.

Section 2(71)

“public company” means a company which—

(a) is not a private company;

(b) has a minimum paid-up share capital, as may be prescribed:

Provided that a company which is a subsidiary of a company, not being a private company, shall be deemed to be public company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles ;

Conjunction ‘and’ is being inserted to ensure that it is not a private company AND has a minimum prescribed capital.
Section 2(76)

For sub-clause (viii) the shall be substituted, namely-

“(viii) any body corporate which is-

(A)   a holing, subsidiary or an associate company of such company;

(B)   a subsidiary of a holding company to which it is also a subsidiary; or

(C)   an investing company or the venture of a company,”

Section 2(76)

“related party”, with reference to a company, means—

(i)                 a director or his relative;

(ii) a key managerial personnel or his relative;

(iii) a firm, in which a director, manager or his relative is a partner;

(iv) a private company in which a director or manager or his relative is a member or  director;

(v) a public company in which a director or manager is a director and holds along with his relatives, more than two per cent. of its paid-up share capital;

(vi)any body corporate whose Board of Directors, managing director or manager is accustomed to act in accordance with the  advice, directions or instructions of a director or manager;

(vii) any person on whose advice, directions or instructions a director or manager is accustomed to act:

Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice,

directions or instructions given in a professional capacity;

(viii) any company which is—

(A) a holding, subsidiary or an associate company of such company; or

(B) a subsidiary of a holding company to which it is also a subsidiary;

(ix) such other person as may be prescribed;

 

Amendment is as per recommendation of the CLC.

 

Scope of related party is expanded.

 

Substitution of the words ‘body corporate’ for the word ‘company’ in the definition of ‘related party’ has expanded the scope of related party, which now includes foreign company which is holding, subsidiary or an associate of Indian Company.

Further sister subsidiary in India or abroad would also be a related party.

 

It seems term ‘investing company’ would mean investor company which could be Indian or foreign and would be treated as related party.

 

 

Section 2(85) Small Company

In sub-clause (i), for the words “five crore rupees” the word “ten crore rupees” shall be substituted

 

In sub-clause (ii)-

(A)   For the words “as per its last profit and loss account”, the words “as per  profit and loss account for the immediately presiding financial year” shall be substituted;

(B)   For the words “twenty crore rupees” the words “one hundred crore rupees” shall be substituted;

 

Section 2(85)

‘‘small company’’ means a company, other than a public company,—

(i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than five crore rupees; or

(ii) turnover of which as per its last profit and loss account does not

exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees:

Provided that nothing in this clause shall apply to—

(A) a holding company or a subsidiary company;

(B) a company registered under section 8; or

(C) a company or body corporate governed by any special Act;

Amendment is as per recommendation of the CLC.

 

Criteria for a private company to be treated as small company includes paid-up share capital or turnover.

Limits for both are being expanded.

 

Drafting error corrected to ascertain turnover from its profit and loss account of the preceding financial year.

Section 2(87) Subsidiary Company

(a)   In sub-clause (ii) for the words “total share capital”, the words “total voting power” shall be substituted;

(b)   The proviso shall be omitted

(c)    In the explanation, item (d) shall be omitted;

 

 

Section 2(87)

“subsidiary company” or “subsidiary”, in relation to any other company

(that is to say the holding company), means a company in which the holding company—

(i) controls the composition of the Board of Directors; or

(ii) exercises or controls more than one-half of the total share capital

either at its own or together with one or more of its subsidiary companies:

Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed.

Explanation.—For the purposes of this clause,—

(a) a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company;

(b) the composition of a company’s Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors;

(c) the expression “company” includes any body corporate;

(d) “layer” in relation to a holding company means its subsidiary or

subsidiaries;

Amendment is as per recommendation of the CLC.

 

In defining ‘subsidiary company’ anomaly arose due to inclusion of preference share capital in total share capital. The same is now being rectified by making reference to total voting power. Thus, where holding company controls more than one-half of total voting power, it becomes subsidiary.

 

Companies are free to have any number of subsidiaries and restrictions on layers of subsidiaries as provided in the proviso is being omitted. Also consequential explanation (d) is being omitted.

It is pertinent to note that the said proviso was not brought to force by MCA.

Corresponding amendment is being made in Section 186(1) also so that companies can make investments in layers of subsidiaries.

 

The J. J. Irani Report also noted that proper disclosures accompanied by mandatory consolidation of financial statements should address the concern attendant to the lack of transparency in holding-subsidiary structure.

A register of beneficial owners of a company, which would address the need to know the ultimate beneficial owners in complex corporate structures.

 

 

Section 2(91) Turnover

“turnover” means the gross amount of revenue recognized in the profit and loss account from the sale, supply, or distribution of goods or on account of services rendered, or both, by a company during a financial year,

Section 2(91)

“turnover” means the aggregate value of the realisation of amount made from the sale, supply or distribution of goods or on account of services rendered, or

both, by the company during a financial year;

Amendment is as per recommendation of the CLC.

The new definition of turnover is verbatim as recommended by CLC.

Earlier definition created practical difficulty of taxes being excluded to arrive at ‘turnover’.

New Section 3A Members serverally liable in certain cases

The following shall be inserted after section 3

 

“3A.If at any time the number of members of a company is reduced, in the case of a public company, below seven, in the case of a private company, below two, and the company carries on business for more than six months while the number of members is so reduced, every person who is a member of the company during the time that it so carries on business after those six months and is cognisant of the fact that it is carrying on business with less than seven members or two members, as the case may be, shall be severally liable for the payment of the whole debts of the company contracted during that time, and may be severally sued therefor.”.

Amendment is as per recommendation of the CLC.

 

New provision is same as section 45 of the Companies Act 1956, which was not part of new Companies Act 2013.

 

It makes members knowing that number of members of a company is below minimum required and the company carries on business for more than six months, then such members are personally liable for the debt contracted during such period.

One Person Company (OPC)

One Person Company

  • by CS Prakash K. Pandya, assisted by Ms. Krinjal Shah

In India, one can have three types of limited company viz. Public Company, Private Company and One Person Company. The concept of One Person Company (OPC) was first recommended by the expert committee of Dr. J.J. Irani in 2005. It is introduced through the Companies Act, 2013. One Person Company means a company which has only one person as a member[1]. It is commonly known as OPC.

The concept of OPC is set to organize the unorganized sector of proprietorship firms and other entities. Small business persons will grow in Indian entrepreneurship, be it weaver, traders, artisans, small to mid-level entrepreneurs, OPC is having an optimistic future and will help them to grow and get globally recognised.

Those who want to start their own ventures with a structure of organized business, OPC provides good option as compared to proprietorship. Similarly, limited liability partnership (LLP) provides structure of organized business as compared to traditional partnership.

How is OPC different from proprietorship?

Paramount difference is that OPC has a legal existence separate from individual who has created it. Consequently, OPC can own assets / property in its own name, including trade mark / other intellectual property rights. Thus, property owned by an individual is different from property owned by OPC created by the same individual.

Liability of OPC is different from its owner. Whereas in proprietorship liability is not distinct and hence liability of partnership extends to its owner and in unfortunate event can extend to personal assets of owner of proprietorship.

OPC can enter into contracts and can file suit against any other person in the name of OPC and not in the name of proprietor. Similarly, liability of OPC is separate from that of its owner.

Whereas in traditional proprietorship, there is no legal existence of proprietorship entity from its owner. Property of proprietorship is the property of the owner and also liability of proprietorship is that of owner. Thus, there is no distinction between owner of proprietorship entity and the proprietorship entity itself.

What business can be carried out by OPC?

Any commercial business, except the following, can be carried out by OPC:

  • Non Banking Financial Investment activities,
  • Investment in securities of any body corporate; and
  • Activities of section 8 company.

How many persons required to form OPC?

As the name suggests, only one individual is required. S/he can be member as well as director of OPC. While there cannot be more than one member in OPC, number of directors can be more than one.

In case of private company, minimum two persons are required as member and same two can be Directors if they are individuals.

And in case of public company, minimum two persons are required as member and three persons as Directors.

In all cases, only individual can be Director.

LLP requires minimum two persons as it’s a partnership with limited liability.

Digital Signature Certificate (DSC) and Director Identification Number (DIN) is mandatorily required for the proposed applicant to be a Director.

Who can form OPC?

Any individual having citizenship of India and stayed in India for atleast 182 days in during the immediately preceding calendar year. Minor cannot neither incorporate OPC nor be entitled to hold shares of OPC beneficial interest.

An OPC can be formed under any of below categories:

  1. Company limited by guarantee.
  2. Company limited by shares.

An OPC limited by shares shall comply with following requirements:

  1. Restricts the right to transfer its shares
  2. Prohibits any invitations to public to subscribe for the securities of the company.

How many OPC can be formed by an individual?

Only OPC can be formed by an individual.

In how many OPC can an individual be nominee?

An individual can be nominee in only one OPC. Where same individual has incorporated an OPC and is nominee in another OPC and he becomes member of such other OPC due to disability of member of such other OPC, then such an individual has to decide within 180 days to remain member in any one of the two OPCs.

What are audit and auditor requirements for OPC?

OPC is mandatorily required to get its books of accounts audited from a Chartered Accountant, as by any other limited company. However, provision relating to rotation of auditor is not applicable to OPC.

What are the compliance requirement for OPC?

Some of the compliance requirements for OPC under the Companies Act 2013 are:

  1. OPC shall have one member and one director. Same individual can be both member and director of the OPC.
  2. Every OPC shall appoint Chartered Accountant as auditor for audit of its books of accounts.
  3. OPC shall have share certificate, where it is limited by shares.
  4. OPC shall maintain register of members, register of contracts and books of accounts with vouchers for every receipt and payment.
  5. OPC need to maintain minutes book of Board Meetings and General Meetings.
  6. OPC need not hold Annual General Meeting of its members, as it’s a single member company. Hence, OPC need not call any general meeting of its members. However, for matters requiring consent of members under the Companies Act 2013 either by ordinary resolution or special resolution, shall be communicated by sole member of OPC to the OPC in writing and it shall be recorded in minutes of meetings of OPC.
  7. While OPC may have more than one Director, even one Director suffices. So in case, OPC has only one Director, decision of a sole Director shall be in writing, signed and dated by such sole director. Such signing date is treated as date of Board Meeting for the purpose of law and needs to be recorded in minutes of meetings.
  8. Where OPC has more than one Director, atleast one Board meeting is required to be held by such OPC in each half of calendar year (01 January to 31 December). While there can be any number of Board meetings by such OPC, gap between two Board meetings in each half of the calendar year shall not be less than 90 days.
  9. OPC having more than one Director, need to hold board meetings in compliance of Secretarial Standard-1.
  10. Annual financial statement of OPC shall be signed by sole / any one Director of OPC.
  11. Along with financial statement, Director(s) of OPC need to give report of Board of Director(s). It shall contain, inter alia, explanation or comments on every qualification, reservation or adverse remark or disclaimer made by the auditor in his report.
  12. Every year, OPC shall file copy of its financial statement with Registrar of Companies (ROC) within 180 days from closure of its financial year i.e. by 30 September every year. Under law, it is mandatory to follow financial year from 01 April to 31 March.
  13. Every year, OPC shall file annual return with ROC.
  14. Any change in nominee shall be intimated to ROC.
  15. For contracts between OPC and its sole member is permitted under law, in case of any such contract where sole member is also the Director of the OPC and if the contract is not in the ordinary course of business of the OPC, then either the contract shall be in writing or if not in writing, terms of contract shall be recorded in writing by way of a summary or entered in minutes of the first meeting of the Board of Directors held immediately after entering into such contract. And in case of a written contract also, the same shall be approved at the first meeting of the Board of Directors held immediately after entering into such contract. Also OPC need to inform ROC about the contract within 15 days of approval of the Board of Directors of the OPC.

What are limitations of OPC?

  1. Every OPC must nominate a nominee (who can be, but need not be, friend, spouse, relative of the applicant) who will become the owner of the OPC in case the promoter of OPC is disabled for any reason. Such nominee shall give consent in writing to be a nominee. And such nominee shall be an individual who is citizen of India and residing in India (for atleast 182 days in during the immediately preceding calendar year). Owner of OPC can change nominee at anytime. Similarly, nominee can withdraw consent any time by giving written intimation to OPC.
  2. Since, OPC is incorporate as private limited company, it need to write ‘One Person Company’ below its name to indicate that it’s a OPC.
  3. OPC cannot convert itself into section 8 Company.
  4. OPC cannot be converted into private or public limited company within two years of its incorporation, except in following cases:
  5. If paid-up capital of OPC exceeds Rs,50 lakh or
  6. If its average annual turnover during relevant period exceeds Rs. 2 crore.

After two years of incorporation, OPC can convert itself voluntarily into private / public limited company.

    • OPC need to mandatorily convert itself into Private / Public limited company within six months of happening the following event:
    • If paid-up capital of OPC exceeds Rs,50 lakh AND
    • If its average annual turnover during relevant period also exceeds Rs. 2 crore.

And OPC need to give intimation of having crossed aforesaid limits to ROC within 60 days/

Sole proprietor can convert its business into OPC. It can have tax advantage (income tax and service tax), however it needs to be planned considering impact of capital gain tax and stamp duty.

[1] Section 2(62) of the Companies Act, 2013

Applicability of Secretarial Standards to private companies

From 01 July, 2015, every meetings of Board and committees thereof as well as General meetings need to comply with Secretarial Standards – notified by the Institute of Company Secretaries of India, after approval of the Central Government. It is applicable to all companies incorporated / registered in India. SS-1 on Board meetings can be downloaded from here and SS-2 on general meetings can be downloaded from here.

[mks_pullquote align=”right” width=”300″ size=”24″ bg_color=”#eeee22″ txt_color=”#000000″]Following provisions of Secretarial Standards (1 & 2) are not applicable to private companies in view of exemptions granted by MCA vide notification dated 05 June 2015 from the provisions of the Companies Act, 2013.[/mks_pullquote]

It may be noted that Secretarial Standards itself provides (under ‘Scope”) that “This Standard is in conformity with the provisions of the Act. However, if, due to subsequent changes in the Act, a particular Standard or any part thereof becomes inconsistent with the Act, the provisions of the Act shall prevail.”

Here is summary on applicability of Secretarial Standards to private companies.

SS-1 Secretarial Standard 1: Meetings of the Board of Directors
2.3 Private companies need not appoint independent directors on their Board and hence need not conduct mandatory one meeting of all the independent directors in one calendar year.
3.2 In case of private company, Notice can also be sent to Interested directors and they can attend (whether physically OR through Video conferencing) as well as vote in the meetings after disclosing his interest. However he shall not be counted for the quorum, as section 174(3) of the Companies Act, 2013, quorum for Board meeting shall be non-interested directors.
6.4 In case of private company, even interested director is entitled to take part in board meeting, after disclosure of his interest.And fact that interested director participated in meeting after disclosure of his interest shall be included in the Minutes Book.
1.3.7 In case of private company, Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014 is not applicable. Hence the agenda of the Board Meeting if contains matter of related party transactions, then the notes to agenda need not be include “specified matters” as per the said Rule 15.Here, specified matters means:
a.    The name of the Related Party and nature of relationship

b.    The nature, duration of the contact and the particulars of contract or arrangement.

c.    The material items of the contract or arrangement including the value, if any.

d.    Any advance paid or received for the contract or arrangement, if any.

e.    The manner of determining the pricing and other commercial terms, both included as part of contract and not considered as part of the contract.

f.     Whether all factors relevant to the contract have been considered, if not, the details of factors not considered with the rationale for not considering those factors.

g.    Any other information relevant or important for the Board to take a decision on the proposed transaction.

 

Interested directors can remain present during the discussion of the Related Party Transactions and where it’s value is beyond prescribed limits, such transactions does not require prior approval of shareholders by way of a special resolution.

It is to be noted that private companies may take benefits of such exemptions as notified by the Central Government from time-to-time after ensuring that such exemptions are in the interest of its shareholders and other stakeholders.

Exemptions to Private companies under Companies Act, 2013 [05 June 2015]

Ministry of Corporate Affairs (‘MCA’) has issued four notifications, all dated 05 June 2015, and thereby granted several exemptions to Private companies, section 8 companies, government companies and nidhi companies. These notifications are issued under section 462 of the Companies Act, 2013 (‘the Act;).

This write-up is restricted to exemptions to private companies (notification G.S.R.464 (E) dated 05 June 2015).

It states that private companies, while complying with such exceptions, modifications and adaptations, as specified, shall ensure that the interests of their shareholders are protected.

Date of coming into force: 05 June 2015.

Section 462(2) of the Act requires ‘notification proposed’ shall be laid ‘in draft’ before the Parliament for a period of 30 days. The gazetted notification states that the same ‘has been’ placed before the parliament for a period of 30 days. Though it is not clear whether the notification is approved, disapproved or modified by Parliament or whether period of 30 days have elapsed without modification or disapproval, it can be presumed that period of 30 days would have elapsed after placing of ‘draft notification’ before both houses of Parliament of India. It can also be presumed that the Parliament would have either approved or would have not made any changes in the draft notification. And consequently, the ‘draft notification’ would have acquired finality.

These presumptions are drawn by me, considering fact that the draft notification is published in Official Gazette. Had it been not approved by the Parliament or said period of 30 days would not have elapsed, after its placement before the Parliament, then MCA would not have issued it in Gazette of India. This is so because, section 462(1) provides that by notification, Central Government may direct that any of the provisions of the Act (a) shall not apply to class(es) of companies or (b) shall apply class(es) of companies with notified exceptions, modifications and adaptations.

Hence, in my view, date of coming into force of exemptions to private companies is 05 June 2015.

Exemptions to private companies and its impact are given below:

Sr. No. Exemption provision Impact
1 Chapter I, sub-clause (viii) of clause (76) of section 2 – Shall not apply with respect to section 188.
Section 188(1) specifies certain types of related party transactions requires approval of Board of Directors at Board meeting, disclosure of specified matters in agenda of board meeting, interested director shall not remain present during discussion of related party transactions, and where it’s value is beyond prescribed limits, such transactions also requires prior approval of shareholders by way of a special resolution with prescribed details to be specified in explanatory statement annexed to notice of general meeting.

The exemption is given to private companies from applicability of said requirements so far as related party transactions are with holding company, subsidiary company, fellow subsidiary company or an associate company. It may be noted that section 188 is applicable to private companies for transactions with related parties specified under section 2 (76) – (other than those stated above). Hopefully, MCA will soon modify Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014.

2 Chapter IV, section 43 and section 47 – shall not apply where memorandum or articles of association of the private company so provides. Section 43 states companies limited by shares can have two kinds of share capital viz. equity (including equity with differential voting rights) and preference share capital. This was also provided under section 86 of the earlier Companies Act, 1956. However sections 85 to 89 of the earlier Companies Act, 1956 were not applicable to private companies [per section 90 of the earlier Companies Act, 1956].

Exemption is provided to private companies from section 43, if either its memorandum or articles of association so provides. The effect could be that private companies may have only one kind of share capital say preference share capital (though term ‘preference’ indicates that there shall be one other kind of share capital). Or private companies can issue equity shares with differential voting rights without compliance of conditions related thereto specified under the Companies (Share Capital and Debentures) Rules, 2014. Hopefully, MCA will soon modify Rule 3 of the Companies (Share Capital and Debentures) Rules, 2014.

Section 47 provides voting rights equity shareholders and preference shareholders. This provision is similar to section 87 of the earlier Companies Act, 1956. As stated above, section 87 was not applicable to private companies [per section 90 of the earlier Companies Act, 1956].

Exemption is provided to private companies from section 47, if either its memorandum or articles of association so provides. The effect could be that private companies can determine voting rights of its equity shareholders and preference shareholders in any manner it desires by incorporating suitable provision in its memorandum or articles of association. It seems the exemption is given to boost investments as it gives freedom to private companies in case of joint venture or private equity funding to structure the capital and voting rights. However, this exemption from section 47 is subject to section 106 of the Companies Act, 2013. Section 106 provides that company can prohibit its members from exercising his voting rights only on the ground (which shall be stated in its articles of association) that no member shall exercise any voting right in respect of the shares on which any calls or other sums presently payable by him have not been paid or in regard to which the company has a right of lien and has exercised that right. A provision similar to section 106 were in sections 181, 182 and 183 of the earlier Companies Act, 1956. However, in the process of combining these three provisions into a single provision of section 106, effect of wordings [section 106(2)] threatened the intended freedom to private companies to raise capital. However, private companies are given option to alter or omit provisions of Section 106 by making suitable provision in its articles of association.

3 Chapter IV, sub-clause (i) of clause (a) of sub-section (1) and sub-section (2) of section 62.- Shall apply with following modifications:- In clause (a), in sub-clause (i), the following proviso shall be inserted, namely:- Provided that notwithstanding anything contained in this sub-clause and sub-section (2) of this section, in case ninety per cent. of the members of a private company have given their consent in writing or in electronic mode, the periods lesser than those specified in the said sub-clause or sub-section shall apply. For increasing paid-up share capital, companies issue further shares. Under section 62, companies need to offer its securities to its existing equity shareholders in the proportion of their shareholding in the company. Section 62 (1)(a)(i) requires companies issuing further shares to send notice along with offer letter to its equity shareholders and the offer shall remain open for subscription for minimum 15 days and maximum 30 days.

Now, relaxation is provided to private companies from requirement of Section 62 (1)(a)(i), by providing that if 90% of the members agree in writing (consent can be even by electronic mode) then the offer can be kept open for lesser than 15 days.

Further section 62(2) requires notice (as aforesaid) shall be sent atleast three days before the opening of the issue. Now, relaxation is provided to private companies from section 62(2), by providing that notice can be sent even lesser than three days before the issue opens, if 90% of the members agree in writing (consent can be even by electronic mode).

4 Chapter IV, clause (b) of sub-section (1) of section 62. – In clause (b), for the words “special resolution”, the words “ordinary resolution” shall be substituted. For offering stock options to employee’s (ESOP), consent of members by way of special resolution is required under section 62(1)(b). Now, consent of simple majority (ordinary resolution) would suffice. This relaxation is applicable to private companies as well as public companies.
5 Chapter IV, section 67. – Shall not apply to private companies –

  1. in whose share capital no other body corporate has invested any money;
  2. if the borrowings of such a company from banks or financial institutions or any body corporate is less than twice its paid up share capital or fifty crore rupees, whichever is lower; and
  3. such a company is not in default in repayment of such borrowings subsisting at the time of making transactions under this section.
Section 67 restricts companies to buy its own shares, except by way of reduction of share capital or redemption of preference shares. Of course companies can buy-back its shares as per provisions of sections 68, 69 and 70.

Private companies are given exemption for section 67, if it satisfies the following three conditions.

(a) body corporate (includes foreign company, LLP) have not invested money in share capital of the private company;

(b) borrowings from banks or financial institution or any body corporate is less than twice the paid up share capital or Rs. 40 crore, whichever is lower; and

(c) such private company has not made default in repayment of borrowings subsisting at the time of purchase of its own shares.

Thus, private companies can buy its own shares in addition to reduction of share capital or redemption of preference shares, if it fulfills above three conditions.

6 Chapter V, clauses (a) to (e) of sub- section (2) of section 73. – Shall not apply to a private Company which accepts from its members monies not exceeding one hundred per cent. of aggregate of the paid up share capital and free reserves, and such company shall file the details of monies so accepted to the Registrar in such manner as may be specified. From 01 April 2014, companies are prohibited from inviting, accepting or renewing deposits from public. Only eligible companies (public limited companies with net worth of Rs.100 crore or turnover of Rs.500 crore) can invite, accept or renew deposits from public, subject to several conditions.

However, companies (public and private) are permitted to accept deposits from its members subject to provision of the Rules and the following conditions:

(a) company issues circular in form DPT-1 to its members;

(b) files form DPT-1 with the ROC within 30 days before the date of its issue to members;

(c) maintains liquid asset of 15% of amount of deposit maturing during the financial and the financial year next following and keeping it in a separate bank account with a scheduled bank to be called as deposit repayment reserve account;

(d) providing deposit insurance;

(e) certifying that the company has not defaulted in repayment of deposit or payment of interest thereon; and

(f) securing deposit accepted from members by creating charge over assets of the company OR where no such charge is created the deposit shall be called “unsecured deposits” and stated so in every circular, form, advertisement etc.

Now, provisions of section 73(2)(a) to (e) is no longer applicable to private companies.

Thus, private companies are permitted to accept deposits from its members subject to provision of the Rules and they need not satisfy aforesaid five conditions (a) to (e) if –

(a) amount of deposits from members does not exceed aggregate of the paid-up share capital and free reserves, and

(b) details of monies accepted as deposit from members is filed with the ROC.

Hopefully, MCA will soon modify Rule 3(3) of the Companies (Acceptance of Deposits) Rules, 2014, which states that maximum amount of deposit that a company may accept from its members shall not exceed 25% of its paid-up share capital and free reserves. Also Rules 4, 5 and 13 requires suitable modifications.

7 Chapter VII, sections 101 to 107 and section 109. – Shall apply unless otherwise specified in respective sections or the articles of the company provide otherwise. Private companies are now given option to adopt provisions stated below or omit the same or provide their own regulations by suitably providing for the same in their articles of association.

Section 101: Notice of general meetings

Section 102: explanatory statement to be annexed to notice of general meetings

Section 103: Quorum for general meetings

Section 104: Chairman of general meetings

Section 105: Proxies Section 106: Restrictions on voting rights

Section 107: Voting by show of hands

Section 109: Demand for poll

8 Chapter VII, clause (g) of sub-section (3) of section 117.- Shall not apply. Private companies are exempted from filing following Board Resolutions with the Registrar of Companies:

(1) to make calls on shareholders in respect of money unpaid on their shares;

(2) to authorise buy-back of securities under section 68;

(3) to issue securities, including debentures, whether in or outside India;

(4) to borrow monies;

(5) to invest the funds of the company;

(6) to grant loans or give guarantee or provide security in respect of loans;

(7) to approve financial statement and the Board’s report;

(8) to diversify the business of the company;

(9) to approve amalgamation, merger or reconstruction;

(10) to take over a company or acquire a controlling or substantial stake in another company;

(11) to make political contributions;

(12) to appoint or remove key managerial personnel (KMP); and

(13) to appoint internal auditors and secretarial auditor.

9 Chapter X, Clause (g) of sub-section (3) of section 141. –Shall apply with the modification that the words ” other than one person companies, dormant companies, small companies and private companies having paid-up share capital less than one hundred crore rupees” shall be inserted after the words “twenty companies”. Following person can be appointed as auditor of a private company

A person who is in not in full time employment elsewhere or a person or a partner of a firm holding appointment as its auditor, if such persons or partner is at the date of such appointment or reappointment holding appointment as auditor of not more than twenty companies. For counting twenty companies – one person companies, dormant companies, small companies and private companies having paid-up share capital less than one hundred crore rupees shall be disregarded.

10 Chapter XI, section 160. – Shall not apply. Section 160 of Companies Act, 2013 is similar to section 257 of the earlier Companies Act, 1956. It gives right to any person (other than a retiring director) to propose himself or any member can propose him as director of the company by sending requisite notice with deposit amount. While provision of section 257 was not applicable to private companies, section 160 is applicable to all companies, including private companies. Now, said section 160 is not applicable to private companies.

Thus, private companies are free to include suitable provision in their articles of association for eligibility of a person (other than retiring director) to be appointed as director of the company.

11 Chapter XI, section 162. – Shall not apply. Section 162 of Companies Act, 2013 is similar to section 263 of the earlier Companies Act, 1956 requiring separate resolutions to be passed at a general meeting for appointment of each directors, where more than one director is to be appointed. While provision of section 263 was not applicable to private companies, section 162 is applicable to all companies, including private companies. Now said section 162 is not applicable to private companies.

Hence, private companies can now move a motion at its general meeting for appointment of two or more persons as directors of the company by a single resolution.

12 Chapter XII, section 180. – Shall not apply. Section 180 of Companies Act, 2013 is similar to section 293 of the earlier Companies Act, 1956, putting restriction on powers of Board and enumerating several matters for which consent of members are required. While provision of section 293 was not applicable to private companies, section 180 is applicable to all companies, including private companies. Now said section 180 is not applicable to private companies.

Hence, Board of Directors of private companies can do following acts even without the consent of its members:

(a) to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company,

(b) to invest compensation received on merger or amalgamation;

(c) to borrow money in excess of aggregate of paid-up share capital and free reserves; and

(d) to remit, or give time for the repayment of, any debt due from a director.

While law gives aforesaid option, private companies may continue to have restrictions of section 180 of the Act or may even provide stricter requirement than section 180.

13 Chapter XII, sub-section (2) of section 184. – Shall apply with the exception that the interested director may participate in such meeting after disclosure of his interest. Section 184(2) of Companies Act, 2013 is similar to section 300 of the earlier Companies Act, 1956, requiring director who is interested in any contract or arrangement placed before the Board at its meeting for approval, not to participate therein. While provision of section 300 was not applicable to private companies, section 184(2) is applicable to all companies, including private companies.

Now it is provided that in case of a private company, interested director may participate in the board meeting, after disclosing his interest.

14 Chapter XII, section 185. – Shall not apply to a private company – (a) in whose share capital no other body corporate has invested any money; (b) if the borrowings of such a company from banks or financial institutions or any body corporate is less than twice of its paid up share capital or fifty crore rupees, whichever is lower; and (c) such a company has no default in repayment of such borrowings subsisting at the time of making transactions under this section. Section 185 of Companies Act, 2013 is similar to sections 295 and 296 of the earlier Companies Act, 1956, prohibiting companies from advancing loan (including represented by book debt) to any of its directors or to any other person in which the director is interested. Prohibition even extends to giving of guarantee or providing any security in connection with any loan taken by him or such other person. While provisions of sections 295 and 296 were not applicable to private companies, section 185 is applicable to all companies, including private companies.

Now, private companies fulfilling following conditions can advance loan (including represented by book debt) to any of its directors or to any other person in which the director is interested. It can also give guarantee or provide any security in connection with any loan taken by him or such other person.

The conditions are:

(a) no other body corporate has invested any money in the share capital of private company; and

(b) the borrowings of such a company from banks or financial institutions or any body corporate is less than twice of its paid up share capital or fifty crore rupees, whichever is lower; and

(c) such a company has no default in repayment of such borrowings subsisting at the time of making transactions.

15 Chapter XII, second proviso to sub- section (1) of section 188. – Shall not apply. Section 188 (1) enumerates several transactions with related parties, which requires approval of Board of Directors at its meeting. And where value of such transactions exceeds prescribed limit, it requires prior approval of members by way of a special resolution. Second proviso to section 188 (1) prohibits member who is a related party from voting at general meeting. This is based on principle that one shall not give approval to transaction in which he is interested. However, in case of private companies, often directors along with their relative are the only shareholders. Restriction under second proviso to section 188 (1) created dead lock as no one could vote at the general meeting. It seems, to overcome such a situation, in case of private companies, member who is a related party can cast vote at general meeting on any of the matters enumerated in section 188(1).
16 Chapter XIII, sub-sections (4) and (5) of section 196. – Shall not apply. Section 196 deals with appointment of managing director, whole-time director and manager. It is similar to sections 197-A, 267, 269, 317, 384, 385 and 388 of the earlier Companies Act, 1956.

Section 196 (4) requires that appointment of a managing director, whole-time director or manager and the terms and conditions of such appointment and remuneration payable shall be approved by the Board of Directors at its meeting. And such appointment and remuneration payable which shall require approval by a resolution at the next general meeting of the company and subject to section 197 of the Act and Schedule V thereto. Such appointment and remuneration may require approval of the Central Government in case such appointment is at variance to the conditions specified in that Schedule.

And under section 196(5) where an appointment of a managing director, whole-time director or manager is not approved by the company at a general meeting, any act done by him before such approval shall be deemed to be valid.

Private companies are now exempted from the requirements of section 196(4) and (5).

Thus, in case of private company, appointment of a managing director, whole-time director or manager and the terms and conditions of such appointment and remuneration payable need not be approved by the Board of Directors at its meeting. And such appointment and remuneration payable which shall not require approval of members by a resolution at the next general meeting of the company and shall not be subject to section 197 of the Act and Schedule V thereto. Consequently, even approval of Central Government would not be required.

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Amendment to E-voting – Rule 20 of Companies (Management and Administration) Rules, 2014

E-voting – Rule 20 of Companies (Management and Administration) Rules, 2014

Ministry of Corporate Affairs notified amendment to e-voting related provision effective from 19 March 2015.

Comparison of earlier and new provision with effects thereof are stated below.

 

Existing provisions New provisions Comment
The provisions of this rule shall apply in respect of the general meetings for which notices are issued on or after the date of commencement of this rule (from the date of commencement of notification in the Official Gazette) For more clarity, MCA has inserted new provision.The amendments would be applicable to all those companies who shall issue notices of the general meeting after the commencement of this rule and not to those companies who have already issued notices before the commencement of this rules
Every listed company or a company having not less than one thousand shareholders,shall provide to its members facility to exercise their right to vote at general meetings by electronic means.

Provided that the Company may provide the facility referred to this in sub-rule on or before 1st January, 2015

Every listed company other than Chapter XB or Chapter XC of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations 2009 or a company having not less than 1000 shareholders shall provide to its members facility to exercise their vote by electronic means It is great relief that e-voting rules are now made applicable only to companies whose equity shares are listed on recognised stock exchange(s) in India. Earlier it was applicable to every listed company (i.e. even where only debt instruments were listed).

E-voting rules continues to apply to companies having 1000 or more shareholders (irrespective of fact that equity shares are listed or not).

However, e-voting rule is not applicable to Small and Medium Enterprises (SME) who has issued specified securities and Listing and Issue of Capital By Small and Medium Enterprises on Institutional Trading Platform without Initial Public offering.

“agency” means the National Securities Depository Limited’ the Central Depository Services (lndia) Limited or any other entity approved by the Ministry of Corporate Affairs subject to the condition that the National securities Depository Limited, the Central Depository Services (India) Limited or such other entity has obtained a certificate from the standardization Testing and Quality Certification Directorate, Department of Information Technology’ Ministry of Communications and Information Technology, Government of lndia including with regard to compliance with parameter specified under Explanation (vi); New provision. Now any other entity approved by MCA can also provide facility for e-voting besides NSDL and CDSL
cut-off date means a date not earlier than 7 days before the date of general meeting to determine the eligibility of the shareholders to vote by electronic means or in the general meeting New provision. Companies were taking cut-off date, generally, at the time of sending notice. Now, more clarity is brought on cut-off date for determining the eligibility of the shareholders for e-voting.
“Cyber security” means protecting information, equipment, devices, computer,computer resource, communication device and information stored therein from unauthorised access,use, disclosures, disruption, modification or destruction “Cyber security” means protecting information, equipment, devices, computer,computer resource, communication device and information stored therein from unauthorised access,use, disclosures, disruption, modification or destruction No change
For the purposes of this rule.(i) the expressions ‘‘voting by electronic means’’ or‘‘electronic voting system’’ means a ‘secured system’ based process of display of electronic ballots, recording of votes of the members and the number of votes polled in favour or against, such that the entire voting exercised by way of electronic means gets registered and counted in an electronic registry in a centralized server with adequate ‘cyber security’; Voting by electronic means includes remote e-voting and voting at the general meeting through an electronic voting system which may be the same as used for remote e-voting Companies are permitted to offer E-voting at general meeting also.This is good relief as companies need not go for poll at general meeting.
‘‘electronic voting system’’ means a ‘secured system’ based process of display of electronic ballots, recording of votes of the members and the number of votes polled in favour or against, in such a manner that the entire voting exercised by way of electronic means gets registered and counted in an electronic registry in a centralized server with adequate ‘cyber security’ No change
Remote e-voting means the facility of casting votes by a member using an electronic voting system from a place other than venue of a general meeting This provision is introduced to differentiate between e-voting at the venue of general meeting and otherwise than at such place.
(ii) the expression ‘‘secured system’’ means computer hardware, software, and procedure that –(a) are reasonably secure from unauthorized access and misuse;(b) provide a reasonable level of reliability and correct operation;

(c) are reasonably suited to performing the intended functions; and

(d) adhere to generally accepted security procedures.

‘‘secured system’’ means computer hardware, software, and procedure that –(a) are reasonably secure from unauthorized access and misuse;(b) provide a reasonable level of reliability and correct operation;

(c) are reasonably suited to performing the intended functions; and

(d) adhere to generally accepted security procedures.

No change
A member may exercise his right to vote at any general meeting by electronic means and company may pass any resolution by electronic voting system in accordance with the provisions of this rule. A member may exercise his right to vote through voting by electronic means and the company shall pass any resolutions in accordance with the provisions of this rule Similar provisions.
A company which provides the facility to its members to exercise their votes atany general meeting by electronic voting system shall follow the following procedure, namely;(i) the notices of the meeting shall be sent to all the members, auditors of the company,

or directors either –

(a) by registered post or speed post ; or

(b) through electronic means like registered e-mail id;

(c) through courier service;

A company which provides the facility to its members to exercise voting by electronic means shall comply with the following procedure, namely:(i)the notice of the meeting shall be sent to all the members, directors and auditors of the company either-(a) by registered post or speed post; or

(b)through electronic means, namely, registered e-mail id of the recipient; or

(c) by courier service

Similar provisions. No change.
(ii) the notice shall also be placed on the website of the company, if any and of the agency forthwith after it is sent to the members; the notice shall also be placed on the website of the company, if any and of the agency forthwith after it is sent to the members; No change
the notice of the meeting shall clearly mention that the business may be transacted through electronic voting system and the company is providing facility for voting by electronic means The notice of the meeting shall clearly state(A)that the company is providing facility for voting by electronic means and the business may be transacted through such voting Earlier electronic voting system and voting by electronic means meant the same meaning. But after this amendment, it has been explained separately for more clarity.
(B)The facility for voting, either through electronic voting system or ballot or polling paper shall also be made available at the meeting and members attending the meeting who have not already cast their vote by remote e-voting shall be able to exercise their right at the meeting New provision inserted. For the convenience of those shareholders who have not cast their votes by remote e-voting, they can cast their vote at the general meeting by any facility for voting available at the general meeting. Thus, companies have option to facilitate voting at general meeting either by e-voting or poll or ballot.
(c) that the members who have cast their vote by remote e-voting prior to the meeting may also attend the meeting but shall not be entitled to cast their vote again This is to bring clarity and offers chance to members who have already voted electronically before attending the general meeting, to speak at the meeting and may be persuade others to vote in a particular manner. Such members cannot vote again at general meeting.
(iv) the notice shall clearly indicate the process and manner for voting by electronic means and the time schedule including the time period during which the votes may be cast and shall also provide the login ID and create a facility for generating password and for keeping security and casting of vote in a secure manner; The notice shall(A) indicate the process and manner for voting by electronic means(B) indicate the time schedule including the time period during which the votes may be cast by remote e-voting

(C)provide the details about the login ID

(D)specify the process and manner for generating or receiving the password and for casting of vote in a secure manner

No change
(v) the company shall cause an advertisement to be published, not less than five days before the date of beginning of the voting period, at least once in a vernacular newspaper in the principal vernacular language of the district in which the registered office of the company is situated, and having a wide circulation in that district, and at least once in English language in an English newspaper having a wide circulation in that district, about having sent the notice of the meeting and specifying therein, inter alia, the following matters, namely:-(a) statement that the business may be transacted by electronic voting;

(b) the date of completion of sending of notices;

(c) the date and time of commencement of voting through electronic means;

(d) the date and time of end of voting through electronic means;

(e) the statement that voting shall not be allowed beyond the said date and time;

(f) website address of the company and agency, if any, where notice of the meeting is

displayed; and

(g) contact details of the person responsible to address the grievances connected with the

electronic voting;

The company shall cause a public notice by way of an advertisement to be published immediately on completion of dispatch of notices for the meeting but at least 21 days before the date of general meeting, at least once in a vernacular newspaper in the principal vernacular language of the district in which the registered office of the company is situated and having a wide circulation in that district and at least once in English language in an English newspaper having country-wide circulation and specifying in the said advertisement, inter alia, the following matters, namely:(a) statement that the business may be transacted through voting by electronic means(b) the date and time of commencement of remote e-voting

(c) the date and time of end of remote e-voting

(d) cut-off date

(e) the manner in which persons who have acquired shares and become members of the Company after the dispatch of notice may obtain the login ID and password

 

Now the public notice by way of newspaper advertisement shall be published immediately on completion of dispatch of notice. Simultaneously e-voting period is also enhanced from 3 days to prescribing minimum 3 days i.e. it can be more and can be from date of dispatch of notice. Further e-voting shall close at 5.00 p.m. on the date preceding the date of the general meeting
(f)The statement that(A)remote e-voting shall not be allowed beyond the said date and time(B)the manner in which the company shall provide for voting by members present at the meeting, and

(C) a member may participate in the general meeting even after exercising his right to vote through remote e-voting but shall not be allowed to vote again in the meeting; and

(D) a person whose name is recorded in the register of members or in the register of beneficial owners maintained by the depositories as on the cut-off date only shall be entitled to avail the facility of remote e-voting as well as voting in the general meeting.

For the convenience of the shareholders, if the members have not voted within the date and time of remote e-voting, he can avail the facility of voting by remaining present (in person or by proxy) at the meeting. Even if has casted his vote under remote e-voting, he is eligible to participate in the general meeting.
(g) website address of the company, if any, and of the agency where notice of the meeting is displayed; and
(h) name, designation, address, email id and phone number of the person responsible to address the grievances connected with facility for voting by electronic meansProvided that the public notice shall be placed on the website of the company, if any, and of the agency
The facility for e-voting shall remain open for not less than one day and not more than three days. Provided that in all such cases, such voting period shall be completed three days prior to the date of the general meeting; The facility for remote e-voting shall be open for not less than three days and close at 5.00 p.m. on the date preceding the date of the general meeting. The period for e–voting has been extended. Now the facility for e-voting can remain open for more than three days but shall be closed at 5.00 p.m. on the date preceding the date of AGM
during the e-voting period, shareholders of the company, holding shares either in physical form or in dematerialized form, as on the record date, may cast their vote electronically

Provided that once the vote on a resolution is cast by the shareholder, he shall not be allowed to change it subsequently

During the period when facility for remote e-voting is provided, the members of the company, holding shares either in physical form or in dematerialized form, as on the cut-off date, may opt for remote e-voting. Provided that once the vote on a resolution is cast by the member, he shall not be allowed to change it subsequently or cast the vote again

 

Provided further that a member may participate in the general meeting even after exercising his right to vote through remote e-voting but shall not be allowed to vote again

Similar provisions. Only cut-off date to be considered in place of record date for the eligibility for the members to vote.It is clarified that a member may participate in the general meeting even after exercising his right to vote through remote e-voting. However such member shall not be allowed to vote again at the general meeting.
At the end of the voting period, the portal where votes are cast shall forthwith be blocked. At the end of the remote e-voting period, the facility shall forthwith be blocked No change
Provided that if a company opts to provide the same electronic voting system as used during remote e-voting during the general meeting, the said facility shall be in operation till all the resolutions are considered and voted upon in the meeting and may be used for voting only by the members attending the meeting and who have not exercised their rights to vote through remote e-voting. New provision. This will save time and cost for company and members attending the general meeting.
The Board of directors shall appoint one scrutinizer, who may be Chartered Accountant inpractice, Cost Accountant in practice, or Company Secretary in practice or an advocate, but not in employment of the company and is a person of repute who, in the opinion of the Board can scrutinize the e-voting process in a fair and transparent manner:

 

 

Provided that the scrutinizer so appointed may take assistance of a person who is not in employment of the company and who is well-versed with the e-voting system

The Board of Directors shall appoint one or more scrutinizer, who may be Chartered Accountant in practice, Cost Accountant in practice or Company Secretary in practice or an advocate, or any other person who is not in employment of the company and is a person of repute who, in the opinion of the Board can scrutinize the voting and remote e-voting process in a fair and transparent manner. Provided that the scrutinizer so appointed may take assistance of a person who is not in employment of the company and who is well-versed with the electronic voting system Similar provisions. Companies have option to appoint one or more scrutinizer who can be either :practicing company secretaries, chartered accountants, cost accountants, advocate or any other person.
the scrutinizer shall be willing to be appointed and be available for the purpose of ascertaining the requisite majority the scrutinizer shall be willing to be appointed and be available for the purpose of ascertaining the requisite majority No change
The Chairman shall, at the general meeting, at the end of discussion on the resolutions on which voting is to be held, shall allow voting with the assistance of the Scrutinizer by use of ballot or polling paper or by using an electronic voting system for all those members who have not casted their votes by remote e-voting. At general meeting, for enabling voting by members (who have not done voting using remote e-voting) company may provide any one of the facilities viz. e-voting or poll or ballot.Scrutinizer needs to be appointed for the same, who may be the same person as for remote e-voting.
the scrutinizer shall, within a period of not exceeding three working days from the date of conclusion of e-voting period, unblock the votes in the presence of at least two witnesses not in the employment of the company and make a scrutinizer’s report of the votes cast in favour or against, if any, forthwith to the Chairman The scrutinizer shall, immediately after the conclusion of voting at the general meeting, first count the votes cast at the meeting, thereafter unblock the votes cast through remote e-voting in the presence of at least 2 witness not in the employment of the company and make a consolidated scrutinizer’s report of the total votes cast in favour of, not later than 3 days of conclusion of the meeting to the Chairman or a person authorized in writing who shall countersign the same.Provided that the chairman or a person authorised by him in writing shall declare the result of the voting forthwith

 

Explanation: It is hereby clarified that the manner in which members have cast their votes, that is, affirming or negating the resolution, shall remain secret and not available to the Chairman, Scrutinizer or any other person till the votes are cast in the meeting

In lieu of separate reports for e-voting, postal ballot and poll, a consolidated scrutinizer’s report is to be prepared by the Scrutinizer for remote e-voting and other facility of voting provided at the general meeting.A report shall be submitted within 3 days from the conclusion of the general meeting

 

Chairman or any person authorized by him shall also countersign the consolidated scrutinizer’s report. This is a newly inserted provision.

 

 

 

 

 

 

New provision: the votes casted by the member (ie. Affirming or negating the resolution) during remote e-voting shall remain confidential till the votes are cast in the general meeting.

This is a welcome move from good governance point of view. Companies would not know if major shareholders have voted in favour or against the proposed resolution, until the scrutinizer prepares consolidated report.

For the purpose of ensuring that members who have cast their votes through remote e-voting do not vote again at the general meeting, the scrutinizer shall have access after the closure of period for remote e-voting and before the start of general meeting, to details relating to members such as their names, folios, number of shares held and such other information who have cast votes through remote e-voting but not the manner in which they have cast their votes. To check whether the members have not cast their votes both by remote e-voting and at the general meeting, the scrutinizer can access to the details of the members who have voted, but not the manner i.e. in favour of the resolution or in against of the resolution since the manner of votes casted by the member shall remain secret as per the clarification issued by MCA. Thus, e-voting facility providers like NSDL, CDSL and other recognized agencies will need to ensure this.These details, would be required to be shared with the Share Transfer Agent to ensure that those attending the meeting are entitled to vote or have already voted using remote e-voting.
the scrutinizer shall maintain a register either manually or electronically to record the assent or dissent received, mentioning the particulars of name, address, folio number or client ID of the shareholders, number of shares held by them, nominal value of such shares and whether the shares have differential voting rights the scrutinizer shall maintain a register either manually or electronically to record the assent or dissent received, mentioning the particulars of name, address, folio number or client ID of the shareholders, number of shares held by them, nominal value of such shares and whether the shares have differential voting rights No change
the register and all other papers relating to electronic voting shall remain in the safe custody of the scrutinizer until the chairman considers, approves and signs the minutes and thereafter, the scrutinizer shall return the register and other related papers to the company. the register and all other papers relating to voting through electronic means shall remain in the safe custody of the scrutinizer until the chairman considers, approves and signs the minutes and thereafter, the scrutinizer shall hand over the register and other related papers to the company. No change
the results declared along with the scrutinizer’s report shall be placed on the website of the company and on the website of the agency within two days of passing of the resolution at the relevant general meeting of members the results declared along with the scrutinizer’s report shall be placed on the website of the Company and on the website of the agency immediately after the result is declared by the Chairman.

Provided that in case of companies whose equity shares are listed on a recognized stock exchange, the company shall, simultaneously, forward the results to the concerned stock exchange or exchanges where its equity shares are listed and such stock exchange or exchanges shall place the results on its or their website

Now the results are to be declared on the website of the company immediately (earlier 2 days’ time was permitted).

 

 

 

Companies whose equity shares are listed shall forward the results to the stock exchange. Stock exchanges in turn are required to place result on their website.

subject to receipt of sufficient votes, the resolution shall be deemed to be passed on the date of the relevant general meeting of members Subject to receipt of requisite number of votes, the resolution shall be deemed to be passed on the date of the relevant general meeting.Explanation: For the purpose of this clause, the requisite number of votes shall be the votes required to pass the resolution as the ordinary resolution or the special resolution as the case may be under section 114 of the Act

 

Now MCA has clarified that the votes shall be requisite as per Section 114 of the Act (by replacing word ‘requisite’ in place of ‘sufficient’.For ordinary resolution, if the votes cast in favour exceeds the votes cast against the resolution.

 

For special resolution, if the votes cast in favour are not less than three times the votes, if any cast against the resolution.

A resolution proposed to be considered through voting by electronic means shall not be withdrawn New provision. This is obvious to avoid situation where voting has take place using remote e-voting and subsequently at general meeting the same cannot be withdrawn.Though nothing is provided on ‘amendment to proposed resolution’ the same shall hold good as for withdrawal of resolution.

Note on amendment to the Companies (Share Capital and Debenture) Rules, 2014 made from 18 march 2015

Note on amendment to the Companies (Share Capital and Debenture) Rules, 2014

by MCA vide notification no. G.S.R. 210(E) dated 18 March 2015.

 

EXISTING AMENDMENT COMMENT
Rule 3 of the Companies (Share Capital and Debentures)Application.- The provisions of these rules shall apply to –

(a) all unlisted pubic companies:

(b) all private companies: and

(c) listed companies

 

so far as they do not contradict or conflict with any other regulation framed in this regard by the Securities and Exchange Board of India

Rule 3 has been substituted, the provisions of this rule shall apply to all unlisted public companies, private companies and listed Companies if so far as they do not contradict or conflict with any other regulation framed in this regard by the Securities and Exchange Board of India. As per the amendment, provision of this rules shall apply to all listed companies so far they do not contradict with any other regulation of SEBI. Which means, where there is conflict between the MCA Rules and SEBI Regulations, SEBI Regulations shall prevail (for listed companies).
Earlier the conditions was applicable to all unlisted companies, all private companies and listed companies.
Clause (b) of sub-rule (3) of Rule 5 (certificate of shares) “The first provisoprovided that, in companies wherein a Company Secretary is appointed under the provision of the Act, he shall deemed to be authorized for the purpose of this rule

 

Second Proviso:

Provided further that, if the composition of the Board permits of it, at least one of the aforesaid two directors shall be a person other than the managing or Whole time director

 

 

Third proviso

Provided also that, in case of a one person company, every share certificate shall be issued under the seal of the Company, which shall be affixed in the presence of and signed by one director or a person authorized by the Board of Directors of the Company for the purpose and the Company Secretary or any other person authorized by the board for the purpose

Clause (b) of sub-rule (3) of Rule 5 (certificate of shares)and

the first proviso

are omitted by this notification

 

 

 

 

 

Provided that, if the composition of the Board permits of it, at least one of the aforesaid two directors shall be a person other than the managing or Whole time director

 

 

 

 

Provided further that, in case of a one person company, every share certificate shall be issued under the seal of the Company, which shall be affixed in the presence of and signed by one director or a person authorized by the Board of Directors of the Company for the purpose and the Company Secretary or any other person authorized by the board for the purpose

 

 

Since the clause (b) of sub rule (3) of Rule 5 are omitted by this notification, so companies wherein a Company Secretary is appointed, he is not required to sign the share certificate. It can be signed by any person authorised by the Board or Secretary.The first proviso has been omitted so the wordings of second proviso substituted accordingly hence there is no effect. 

 

The first proviso has been omitted so the wordings of third proviso substituted accordingly hence there is no effect.

In clause c of sub-rule 2 of Rule 6 (Issue of renewed or duplicate share certificate)In case of listed companies renewed or duplicate certificate shall be issued within 15 days from the date of submission of complete documents with the company respectively In clause (c) of sub-rule 2 of Rule 6 (Issue of renewed or duplicate share certificate)As per notification , listed companies renewed or duplicate certificate can be issued within 45 days from the date of submission of complete documents with the company respectively The time limit for issue of duplicate share certificates has been extended from 15 days to 45 days.
In clause (c) of sub-rule 1 of Rule 12,“Employee means(a) permanent employee of the company who has been working in India or outside India; or

(b) a director of the company, whether a whole time director or not but excluding an independent director

(c) an employee as defined in clauses (a) or (b) of a subsidiary, in India or outside India, or of a

holding company of the company and or of an associate company”

In clause (c) of sub-rule 1 of Rule 12,the explanation of the word “employee” has been amended

 

“Employee refers to

(a) permanent employee of the company who has been working in India or outside India; or

(b) a director of the company, whether a whole time director or not but excluding an independent director

(c) an employee as defined in clauses (a) or (b) of a subsidiary, in India or outside India, or of a

holding company of the company

 

Since the word “of an associate company” has been omitted, now employee means employees of a subsidiary and holding company and the employees of the associate company shall not be considered for the purpose of offering ESOP.
In Rule 13 first proviso states thatProvided that the price of shares to be issued on a preferential basis by a listed company shall not be required to be determined by the valuation report of a registered valuer In Rule 13, MCA has inserted following new proviso before the existing proviso“Provided that in case of any preferential offer made by a company to one or more existing members only , the provisions of sub rule (1) and proviso to sub rule (3)of rule 14 of Companies (prospectus and allotment of securities)Rules, 2014 shall not apply” 

 

As per notification, in case of any preferential allotment made by a company to existing members, there is no requirement of making open offer in Form PAS 4 and filling thereof with the ROC/SEBI is not required.However, complete record of private placement offers in Form PAS 5 is required to be maintained.

 

The first proviso has been newly inserted so the wordings of first proviso substituted to “Provided further” that accordingly hence there is no effect.

 

existing clause (d) of Rule 18(1) states that(d) the security for the debentures by way of a charge or mortgage shall be created in favour of the debenture trustee on-(i) any specific movable property of the company (no being in the nature of pledge ); or

(ii) any specific immovable property wherever situate, or any interest therein.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MCA has amended existing clause (d) of Rule 18(1),(d) the security for the debentures by way of a charge or mortgage shall be created in favour of the debenture trustee on-(i) any specific movable property of the company; or

(ii) any specific immovable property wherever situate, or any interest therein.

Provided that in case of non-banking financial company, the charge or mortgage under sub clause (i) may be created on any movable property.

Provided further that in case of any issue of debentures by a government company which is fully secured by the guarantee given by the Central Government or one or more State Government or by both, the requirement for creation of charge under this sub-rule shall not apply.

 

Provided also that in case of any loan taken by a subsidiary company from any bank or financial institution the charge or mortgage under this sub-rule may also be created on the properties or assets of the holding company.

 

As per the notification, now the security for the debenture can be created on any specific movable property including pledge of specific movable property.However, in case of non-banking financial company, the charge or mortgage may be created on any movable property (need not be specific).

 

Further notification states that the issue of debentures by a government company which is fully secured by the guarantee given by the Central Government or one or more State Government or by both, the requirement for creation of charge under this sub-rule shall not apply.

 

And where any loan is availed by a subsidiary company from any bank or financial institution, its holding company are allowed to offer its property as security –i.e. the charge or mortgage may also be created on the properties or assets of the holding company.

Use of words ‘may also’ suggests ‘in addition’ and not ‘alternatively’. Thus, where debentures are issued by a subsidiary, it need to create charge on its own assets. In addition, charge over assets of holding company is permitted where debenture issuing subsidiary company has availed loan from bank or financial institution.

 

In Sub rule 5 of Rule 18A trust deed in Form No SH 12 shall be executed by the company in favour of debenture trustees within 60 days of allotment of debentures Now trust deed in Form SH.12 shall be executed by the company in favour of the debenture trustees within three months of closure of the issue or offer of debentures This provision has been amended in line with clause 15(1) of SEBI (Issue and listing of Debt Securities) Regulations, 2008.
Following new rules has been inserted after existing sub-rule (8) of Rule 18 of Companies (Share Capital and Debenture)9. Nothing contained in this rule shall apply to any amount received by a company against issue of commercial paper or any other similar instrument issued in accordance with the guidelines or regulations or notification issued by the Reserve Bank of India. 

10.In case of any offer of foreign currency convertible bonds or foreign currency bonds issued in accordance with the Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 or regulations or directions issued by the Reserve Bank of India, the provisions of this rule shall not apply unless otherwise provided in such Scheme or regulations or directions

 

Rule 18 is made not applicable to companies raising funds by issue of commercial paper or any other similar instrument (i.e. money market instruments) or FCCB or FCB.
Form SH 13 for nomination and Form SH 14 for cancellation or variation in nomination As per the notification , in the Form SH 13 and Form SH 14 “particulars of nominee in case minor nominee dies before attaining age of majority” has been inserted Format of Form SH 13 and Form SH14 has been revised – now it includes details of nominee, in case minor nominee dies before attaining age of majority.

 

Section 76: Acceptance of deposits from public by certain companies.

76. (1) Notwithstanding anything contained in section 73, a public company, having such net worth or turnover as may be prescribed, may accept deposits from persons other than its members subject to compliance with the requirements provided in sub-section (2) of section 73 and subject to such rules as the Central Government may, in consultation with the Reserve Bank of India, prescribe:

Provided that such a company shall be required to obtain the rating (including its networth, liquidity and ability to pay its deposits on due date) from a recognised credit rating agency for informing the public the rating given to the company at the time of invitation of deposits from the public which ensures adequate safety and the rating shall be obtained for every year during the tenure of deposits:

Provided further that every company accepting secured deposits from the public shall within thirty days of such acceptance, create a charge on its assets of an amount not less than the amount of deposits accepted in favour of the deposit holders in accordance with such rules as may be prescribed.

(2) The provisions of this Chapter shall, mutatis mutandis, apply to the acceptance of deposits from public under this section.

Provisions of the Companies Act, 2013:
Chapter V: ACCEPTANCE OF DEPOSITS BY COMPANIES [Sections 73 to 76]

For this chapter, the Companies (Acceptance of Deposit) Rules, 2014 (‘the Rules’) are notified with effect from April 01, 2014.

Section 76: Acceptance of deposits from public by certain companies.
Section 76 is brought to force from April 01, 2014.

Corresponding provisions of the Companies Act, 1956:
No such provision.

Corresponding provisions of the English Companies Act, 2006:
No such provision.

Applicability:
[highlight]Section 76 is applicable to certain public companies accepting or intending to accept deposits from public.[/highlight]

For acceptance of deposits [highlight]from members[/highlight] by a public company as well as private company, section 73 is applicable.

Private companies are prohibited from accepting deposits from public. However, banking companies, NBFCs and other companies to be specified by the Government can accept deposits from public.

Prohibition on acceptance of deposits contained in section 73 shall not apply where a public company accepts deposits in compliance of section 76 of the Act.

What is the difference from the Companies Act, 1956:

Comments:
Only certain eligible public companies can accept deposits from public (public deposit).

Rule 2(1) (e) of the Rules defines ‘eligible company’ as under:

“eligible company” means a public company as referred to in sub-section (1) of section 76, having a net worth of not less than one hundred crore rupees or a turnover of not less than five hundred crore rupees and which has obtained the prior consent of the company in general meeting by means of a special resolution and also filed the said resolution with the Registrar of Companies before making any invitation to the Public for acceptance of deposits:
Provided that an eligible company, which is accepting deposits within the limits specified under clause (c) of sub-section (1) of section 180, may accept deposits by means of an ordinary resolution.

Eligible public companies may accept deposits from public, subject to ((section 76(1) ))

(a) compliance of conditions of section 73(2),
(b) compliance of the rules which the Central Government shall frame in consultation with the Reserve Bank of India,
(c) obtaining the rating (including its net worth, liquidity and ability to pay its deposits on due date) from a recognised credit rating agency for informing the public the rating given to the company at the time of invitation of deposits from the public which ensures adequate safety AND the rating shall be obtained for every year during the tenure of deposits; and
(d) creating a charge on its assets, if public deposit is a secured deposit, within thirty days of such acceptance. Amount of charge shall not be less than the amount of deposits accepted from public in favour of the deposit holders in accordance with the rules.

Following conditions are specified under section 73(2), which shall be fulfilled by eligible public company to accept deposits from public ((Section 73(2) )).

  1. Obtaining consent of members by ordinary resolution. However, where borrowing of a company has exceeded limit specified in clause (c) of section 180(1) of the Act, consent of members by way of special resolution is required.
  2. filing a circular with the Registrar of Companies (before issuing it to members). Such circular to state financial position of the company, credit rating obtained, total number of depositors from which the company has already accepted deposits, deposit amount due for repayment and other details as the Government may prescribe.
  3. issuing aforesaid circular to members of the company within 30 days of filing with the Registrar.
  4. maintaining liquid asset by depositing minimum of 15% of the amount of deposits maturing during the current and next financial year (i.e. two financial years). Such liquid asset shall be kept in a separate bank account with any of the scheduled commercial banks. Such bank account shall be called [highlight]deposit repayment reserve account[/highlight]. For example, if name of company is XYZ Limited, then it shall have a bank account called ‘XYZ Ltd – deposit repayment reserve account’. The deposit repayment reserve account shall not be used by the company for any purpose other than repayment of deposits. ((Section 73(5) ))
  5. provide deposit insurance up to such extent and in a prescribed manner.
  6. certifying that the company has not committed any default in the repayment of deposits accepted either before or after the commencement of the Act of 2013 or payment of interest on such deposit.
  7. optionally providing security, including creation of charge on assets of the company, for due repayment of the deposit amount or interest thereon. And where no security is provided for the repayment, such deposits shall be termed as “unsecured deposits”. And words “unsecured deposits” shall be quoted in every circular, form, advertisement or in any document related to invitation or acceptance of deposits.

Provisions of sections 73, 74 and 75 of the Act shall apply mutatis mutandis to acceptance of deposits from public by eligible public companies.