Ease of doing business: Debt listed companies slide down to unlisted companies
Companies with listed but privately placed debt paper not to be regulated as ‘listed company’.
FCS Vinita Nair | Senior Partner, Vinod Kothari & Company
With an intent to promote listing of securities and bond market, Ministry of Corporate Affairs (MCA) in consultation with Securities and Exchange Board of India (SEBI), intended to exclude certain class of companies from the definition of ‘listed company’ as defined under Section 2 (52) of Companies Act, 2013 (CA, 2013). The existing provisions of CA, 2013 applicable to a listed company did not distinguish between private companies and public companies. As a result, private companies were unintendedly subject to similar compliance as a public company. A browse through the list of companies with listed privately placed debentures, shows private companies abound in the list[1]. On the other hand, public companies that listed debt securities on a private placement basis, were subject to similar compliances as a public company issuing debt securities to public.
Accordingly, one of major amendments proposed in Companies (Amendment) Act, 2020 (CAA, 2020) was to revisit definition of listed company and provide a suitable carve out to certain class of companies to be determined in consultation with SEBI.
The rationale behind the carve out, as explained in the Report of the Company Law Committee of November, 2019[2] was that private companies listing its debt securities on any recognized stock exchange were subject to more stringent regulations compared to unlisted private companies viz. appointment of auditors, independent directors, woman directors, constitution of board committees etc. that were dis-incentivizing private companies from seeking listing of their debt securities. This was also discussed in the Report of Company Law Committee in 2016[3] wherein the Committee, while acknowledging the anomaly in the definition of listed company, felt that while the definition of the term ‘listed company’ need not be modified, the thresholds prescribed for private companies for corporate governance requirements may be reviewed. Further, the Committee proposed that specific exemptions under Section 464 of CA, 2013 could also be given to listed companies, other than equity listed companies, from certain corporate governance requirements prescribed in the Act.
Currently, companies issuing non- convertible debt securities (NCDS) or non-convertible redeemable preference shares (NCRPS) on a private placement basis, list the same under SEBI (Issue and Listing of Debt Securities Regulations, 2008 (SEBI ILDS) and SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013 (SEBI ILNCRPS) respectively and are regarded as ‘listed company’ for the provisions of CA, 2013.
Present amendment
While the amendment made in Section 2 (52) in the definition of ‘listed company’ was notified with effect from January 22, 2021[4], the class of companies were pending to be prescribed. Ministry of Corporate Affairs (MCA) on February 19, 2021[5] notified Companies (Specification of Definition Details) Second Amendment Rules, 2021 effective from April 1, 2021 to insert Rule 2A excluding following class of companies from the definition of ‘listed company’ under CA, 2013
- Public companies with listed NCDS issued on private placement basis in terms of SEBI ILDS;
- Public companies with listed NCRPS issued on private placement basis in terms of SEBI ILNCRPS;
- Public companies with listed NCDS and NCRPRS issued on private placement basis in terms of SEBI ILDS and SEBI ILNCRPS respectively;
- Private companies with listed NCDS in terms of SEBI ILDS.
- Public companies with equity shares exclusively listed on stock exchanges in permissible foreign jurisdictions under Section 23 (3) of CA, 2013.
Point to note here is that companies with listed commercial papers were anyways outside the purview of listed companies as commercial papers are excluded from the definition of debentures.
Listed company post amendment
Post amendment, the definition of listed company will mainly comprise of public companies offering securities to public i.e. having listed equity shares in India (with or without ADR/GDR listed overseas), listed debt securities pursuant to public issue or listed NCRPS pursuant to public issue.
Compliances for listed company under CA, 2013
A listed company is required to ensure following additional compliances under CA, 2013:
| Amount in Rs/ Other specification | Section No. | Rule No. | Brief of the provision | Other thresholds under CA, 2013 |
| 1. Provisions/ exemptions applicable to all listed companies | ||||
| Exemption for creation of Debenture Redemption Reserve (DRR) | 71 | 18 (7) (b) (iii) (B) of SHA Rules | Listed NBFCs need not create DRR for privately placed and public issue of debentures. | Refer discussion below |
| Creation of Debenture Redemption Fund (DRF) | 71(4) | Rule 18(7)(b)(v) of SHA Rules as amended. | No requirement for creation of DRF by listed companies issuing debenture on private placement basis. | Refer discussion below |
| Annual return | 92 | 11 of MGT Rules
|
Company to file Annual Return certified by a PCS in Form MGT-8 | Applicable to Company with
|
| Records in electronic form | 120 | 27 of MGT Rules | Company may maintain records in electronic form.
Note: Whether companies other than those specified have the option to maintain in electronic form, is not clear. |
Company having not less than 1000 shareholders, debenture holders and other security holders. |
| Investigation by NFRA
|
132 | Rule 3(1)(b) of NFRA Rules | NFRA shall undertake investigation or conduct quality review of audit. |
|
| Statement in Board report indicating manner of Board evaluation | 134(3) | 8 (4) of AOC Rules
|
A statement indicating manner in which formal evaluation of Board, committee and individual directors has been done by Board needs to be included in Board’s report. | Public company having a paid up share capital of Rs. 25 crore or more calculated at the end of the preceding financial year. |
| Financial statements in electronic form | 136 | 11
of AOC Rules |
Financial statements may be sent in electronic format. | Public companies which have
|
| Internal auditor | 138 | 13
of AOC Rules |
Appointment of internal auditor or a firm of internal auditors to conduct internal audit. |
|
| Appt/ re-appt of Auditor | 139
(2) |
5 of ADT Rules
|
Restriction on term of appointment or reappointment of auditor. Rotation of Statutory Auditors mandatory. |
|
| Woman Director | 149
(1) |
3 of DIR Rules
|
Appointment of a Woman Director on the Board.
Any intermittent vacancy of a woman director shall be filled-up by the Board at the earliest but not later than immediate next Board meeting or three months from the date of such vacancy whichever is later. |
Public company having –
|
| Small shareholder director | 151 | 7 of DIR Rules
|
May appoint a small shareholder director suo moto or upon notice from shareholder. | – |
| Vigil mechanism | 177 | 7 of MBP Rules
|
Company to establish vigil mechanism for their directors and employees to report genuine concerns. |
|
| Disclosure in Board’s Report | 197
(12) |
5 of MR Rules
|
Disclosure in Board’s report regarding ratio of the remuneration of each director to the median employee’s remuneration and such other details as prescribed in the Rules. | – |
| Appointment of KMP | 203 | 8 of MR Rules | Appointment of whole-time key managerial personnel.
|
|
| Secretarial Audit Report | 204 | 9(2) of MR Rules
|
Shall annex with its Board’s report a secretarial audit report, given by a company secretary in practice |
|
| 2. Provisions applicable only to a listed public company | ||||
| Report on Annual General meeting | 121 | 31 of MGT Rules
|
Report on AGM to be filed with the Registrar in eForm MGT-15. | – |
| Independent Director | 149
(4) |
4 of DIR Rules
|
Atleast 1/3rd of total number of Board members shall be independent directors. |
|
| Constitution of certain committees | 177 & 178 | 6 of MBP Rules
|
Constitution of Audit Committee and Nomination and Remuneration Committee. |
|
With the present amendment, the class of companies provided above will not be required to ensure aforesaid compliances unless it meets other criteria/ thresholds prescribed for respective compliance.
As evident from the table above, a public company will hardly have any exemptions if it meets any of the thresholds specified. While the intent of exempting class of companies is benign, it will be of some benefit to public companies only if the other thresholds are also revised. While, the holy wish is for ease of doing business, static thresholds prescribed in 2013 needs to be revisited to assess the adequacy and the intent to regulate such class of companies. For e.g. public companies having paid up capital of 10 crore or borrowing of Rs. 50 crore is a very common phenomena.
Additionally, in case the sectoral regulator prescribes composition of committee or induction of independent directors or other corporate governance requirement, those will override the exemptions.
Applicability of DRR and DRF[6]
Section 71(4) read with Rule 18(1)(c) of the Companies (Share Capital and Debentures) Rules, 2014 (SHA Rules) requires every company issuing debentures to create a Debenture Redemption Reserve (DRR) of 10% (as the case maybe) of outstanding value of debentures for the purpose of redemption of such debentures.
Some class of companies as prescribed, has to either deposit, before April 30th each year, in a scheduled bank account, a sum of at least 15% of the amount of its debentures maturing during the year ending on 31st March of next year or invest in one or more securities enlisted in Rule 18(1)(c) of SHA (DRF).
Pursuant to the present amendment, it is important to ascertain applicability of creation of DRR and DRF in terms of CA, 2013. The exemption in relation to DRR and DRF was applicable to listed companies in case of private placement. While NBFCs continue to enjoy exemption even in case of unlisted companies, pursuant to the present amendment Non-NBFCs listing NCDS will not be eligible to avail the benefit of the said exemption and will be required to maintain DRR and DRF.
One may argue that the securities are listed, although the company is not, and accordingly the exemption extended to listed companies should be equally available for unlisted companies with listed securities.
Applicability of Rule 9A of PAS Rules
Section 29 of CA, 2013 read with Rule 9A of Companies (Prospectus and Allotment of Securities) Rules, 2014 (PAS Rules)[7] effective from October 2, 2018 mandates unlisted public companies to issue the securities only in dematerialised form and facilitate dematerialisation of all its existing securities. Physical transfer of securities is prohibited for unlisted public companies. Compliance with the said provisions are exempt only in case of a Nidhi, Government company and wholly owned subsidiary.
Pursuant to amendment in the definition of listed company, public companies that were originally exempted from the requirements by virtue of being a listed company, will now be required to comply with Section 29 and Rule 9A.
Status under Listing Regulations and SEBI ILDS
‘Listed entity’ as defined under Reg. 2 (p) of SEBI (Listing Obligations and Disclosures Requirements) Regulations, 2015 (Listing Regulations) means an entity which has listed, on a recognised stock exchange(s), the designated securities issued by it or designated securities issued under schemes managed by it, in accordance with the listing agreement entered into between the entity and the recognised stock exchange(s).
The present carve out under CA, 2013 will not result in any carve out for compliances under Listing Regulations as Listing Regulations anyways provides separate set of compliances equity listed companies (Chapter IV) and only NCDS/NCRPS listed companies ( Chapter V) and those with equity and debt listed (Chapter VI).
Further, SEBI Circulars issued from time to time under SEBI ILDS are addressed to all listed entities who have listed their debt securities or issuers who propose to list their debt securities.
Status under PIT Regulations
SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations) does not define the term ‘listed company’, however, applies to listed company and securities of an unlisted company proposed to be listed. The definition of ‘proposed to be listed’ is as hereunder:
“proposed to be listed” shall include securities of an unlisted company:
(i) if such unlisted company has filed offer documents or other documents, as the case may be, with the Board, stock exchange(s) or registrar of companies in connection with the listing; or
(ii) if such unlisted company is getting listed pursuant to any merger or amalgamation and has filed a copy of such scheme of merger or amalgamation under the Companies Act, 2013.”
The term ‘listed company’ is not being defined under PIT Regulations and therefore, the definition under CA, 2013 should be referred pursuant to Reg. 2 (2) of PIT Regulations[8]. In that case, PIT Regulations will apply only in case of securities issued by a listed company or a company that is proposed to become a ‘listed company’. Accordingly, only debt/ NCRPS listed companies need not comply with requirements of PIT Regulations. SEBI should consider furnishing a clarification in this regard.
However, that is not the intent of law. If a security is listed, its price is subject to change and be impacted by price sensitive information. Accordingly, such exclusively debt/ NCRPS listed companies, on account of private placement of securities, should continue to comply with the requirements of PIT Regulations. SEBI may also consider furnishing a clarification in this regard.
Conclusion
While, the present amendment expands the originally envisaged carve out for private companies to public companies as well, given the other static thresholds prescribed under CA, 2013 public companies have little reason to rejoice. Exemption to comply with PIT Regulations may be a huge relief, however, there is a need for SEBI to clarify the position given the intent of law.
Further, it is very crucial that MCA revisits DRR and DRF related provision for privately placed NCDS and consider to relax the same especially for the benefit of Non-NBFCs. Lastly, suitability of the exemption in case of companies exclusively listed in foreign jurisdiction will be required to be evaluated after a certain lapse of time as the provisions have been recently inserted in CA, 2013.
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[1] https://www.bseindia.com/markets/debt/debt_instruments.aspx?curpage=4&select_alp=all&select_ord=1
[2] Ministry of Corporate Affairs, Government of India, ‘Report of the Companies Law Committee’
(November 2019) para 2.
[3] Ministry of Corporate Affairs, Government of India, ‘Report of the Companies Law Committee’
(February 2016) para 1.13.
[4] http://www.mca.gov.in/Ministry/pdf/CommencementNotification_23012021.pdf
[5] http://egazette.nic.in/WriteReadData/2021/225287.pdf
[6] Refer our write up ‘Easing of DRF’ and ‘Provisions relating to DVR & DRR- stands amended’ by CS Smriti Wadehra.
[7] Discussed in our write up ‘Physical to Demat: A move from opacity to transparency’.
[8] Words and expressions used and not defined in these regulations but defined in the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Securities Contracts (Regulation) Act, 1956 (42 of 1956), the Depositories Act, 1996 (22 of 1996) or the Companies Act, 2013 (18 of 2013) and rules and regulations made thereunder shall have the meanings respectively assigned to them in those legislation.
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