Ministry of Finance approves amendment in Chit Funds’ law

By Mayank Agarwal (finserv@vinodkothari.com)

The Ministry of Finance (“MoF”) has introduced The Chit Funds (Amendment) Bill, 2018 (“Bill”) on 20th February, 2018,[1] bringing in some noteworthy changes to the Chit Funds Act, 1982 (“Act”).

The Rs. 500 billion Chit Fund industry has had its fair share of ups & downs in the country.[2] While the sector emerged as a prominent alternative to established financial institutions in the country during its early years due to cheaper rates and easier access to funds, however, it has gradually lost its charm.

The Chit Funds law, which was introduced in 1982, as a counteractive measure of the Sanchaita scam in 1978, was itself subject to abusive use in the later part of 2000s as a number of chit fund related scams came to fore, notably, the Sharada scam and the Rose Valley scam.

The chit funds industry has had to travel a tumultuous path, be it the systemic breakdowns due to the scams or government reforms like demonetisation and introduction of GST. All of these took the investors away from the industry.

Given the fact that the poor and lower-middle income sector of the country still rely heavily on chit funds to mobilise their hard earned money, the MoF has brought in the Bill in order to alleviate concerns relating to its downfall and encourage systematic growth within this sector. The amendments aim at alleviating some concerns associated with this already vanishing industry and aims to increase financial inclusion by bring the down-trodden and unbanked sectors of the society within the financial fold.

In this write-up we have enlisted the amendments brought in by the Bill, its implication and the aim behind bringing in such modifications.

Amendment to Section 2(b) and 11(1): Use of the words “Fraternity Funds”

In addition to the words “chit”, “chit fund”, “chitty” or “kuri”, any business involved in running chit fund schemes must incorporate “Fraternity Funds” along with its name in order to express its inherent nature as a chit fund company and to distinguish it from a “Prize Chit”, which is illegal in nature and banned.

Amendment to Section 16(2) and Section 17: Presence of at least 2 subscribers

While presence of at least 2 subscribers to the fund was a must during the draw of chit (as per Section 16(2)) and during the time of preparation of minutes of the draw (as per Section 17), the Bill relaxes such requirements and permits the presence of 2 subscribers through video conference, which must be duly recorded by the foreman of the scheme. Further, their signatures to the minutes can be obtained within a period of 2 days from the preparation of the minutes.

Amendment to Section 21(b): Foreman’s commission

One of the most significant reforms proposed in the Bill are the increase in the foreman’s commission from the earlier ceiling of 5% to 7%. Such reform comes against the backdrop of increasing costs and overheads associated with running a chit fund, while the commissions have remained stagnant.

This is going to encourage more and more people to come forward with such schemes. However, it would also reduce the amount disbursed to the bidder post deduction of commission and hence, leave him financially dis-advantaged.

Amendment to Section 85(b): Removal of ceiling

Section 85(b) of the Act mandates that any chit fund running solely or two or more chit funds being run by the same foreman shall be exempted from the provisions of the Act provided the aggregate amount of the same does not exceed 100 rupees.

Given the fact that such meagre amount holds no relevance in today’s age, the Bill has abolished the same and granted freedom to State governments to levy a ceiling as per their choice and increase the same at regular intervals.

Right to Lien

A new provision that has been brought in by the Bill is the right to lien for dues from subscribers that has been granted to the foreman so as to allow set-off to the chit company in cases when a subscriber, who has already drawn funds, defaults.

This provision is significant as it reduces credit risk associated with such schemes. Not only does it protect the interests of other subscribers to the scheme, it also safeguards the chit company in cases of default.

Industry response to the amendments

The chit fund industry has not been entirely enthused by the proposal brought in by the Bill. The sector was already left choking when GST implementation led to a hefty jump in tax from the previous rate of 10.5% to 12%. Despite representation from the All India Association of Chit Funds (AIACF), apex body of chit fund companies in the country, the rates were not reduced and brought on par with those of other NBFCs.

Now, the Bill has also ignored the request of the association. Given the fact that the ratio of number of unregulated players to regulated ones is 100:1, the association had hoped implementation of proposals that are in line with the theme of bringing more and more players within the regulatory ambit. Relaxation of security amount from 100% to 50% of the chit value was another major plea of the industry, however, the Bill ignores the same as well.

Conclusion- A step too-little

While the Bill aims at easing compliance burden and regulatory restrictions on this fading industry, it is a step too-little too-late. Although the increase in commission fees and relaxation of physical presence of 2 subscribers is a welcome move, it is not enough to provide impetus to the industry and fails to tackle the major problem of a vast number of unorganised players.

Leaving myriad questions unanswered, AIACF says that the Bill totally ignores the pleas made by the association and has done nothing to convert un-organised sector into organised and bring them within the regulatory ambit.


[1] http://www.pib.nic.in/PressReleseDetail.aspx?PRID=1521038

[2] http://www.business-standard.com/article/economy-policy/chit-funds-sore-about-amendment-bill-say-it-won-t-safeguard-public-money-118022000685_1.html

Crucial Step taken by MCA to remove the curtain on SBOs

By Pammy Jaiswal & Richa Gupta (corplaw@vinodkothari.com)

 

Introduction

Over the past few years, regulatory changes have conspired to re-define and re-examine the corporate structures in order to have an efficient and transparent environment to work in. A very recent and crucial step taken by MCA is with regard to revamping the provisions of section 89 and 90 of the Companies (Amendment) Act, 2017 (‘Amendment Act’). As all the stakeholders were waiting for the clarity to come in by way of rules in this connection, MCA has on 15th February, 2018 come out with the Companies (Beneficial Interest and Significant Beneficial Interest) Rules, 2018[1] (hereinafter called as “ Draft SBO Rules’’).

Changes under section 89 and Draft SBO Rules

The major change in section 89, was defining the term ‘significant beneficial owner’ which in itself is a vital in terms interpreting the whole section. The scope of the section has been made very broad by covering all aspects of pledge, proxy, power of attorney executed in relation to shares. This was much needed to catch hold of those behind the veil.

The Draft SBO Rules in this regard are slightly different from the existing rules. While the erstwhile MGT-4 , MGT-5 and MGT-6  are now renamed as BEN-1, BEN-2 and BEN-3 respectively, the contents of the declaration and return are same, however, BEN-3 will be filed by the company within 30 days of receiving complete declarations from both the registered and beneficial owners. This has been mentioned by way of an explanation and is relevant because, reference to section 403 has been removed from this section as well. Therefore, even if the gap between date of receiving declaration and filing return is beyond a period of 30 days due to incomplete information in the in respective declaration of the registered as well as the beneficial holder, it seems that the law will allow putting the date on which complete information received such persons in BEN-3.

Changes under section 90 and Draft SBO Rules

Section 90 has been completely re-vamped under the Amendment Act. Looking at the language of law, the intent is very clear that the individual significant beneficial owner (‘SBO’) has to come out of his hideaway. The onus is on such SBO and person who may have the knowledge about such SBO to disclose the nature and extent of significant interest. The company on which such SBO has significant influence is required to to do (i) maintain register of the interest declared by individuals and changes therein, (ii) file return of SBO to the RoC in BEN-5 and (iii) to ask for information from such person on whom the company has reason to believe to have information on such SBOs.

While the intent of law is to identify the individual being the SBO, the Draft Rules in this connection have the following ambiguities:

  • BEN-4 (‘declaration by SBO’) contains a filed for writing the particulars of the SBO, which also has place for writing Corporate Identification Number (‘CIN’) of such SBO, being a company. If the intent was to identify corporate SBO, section 89 has a provision to take care of the same. Hence, having such field in BEN-4 seems to be contradictory to the language of section 90.
  • The exemption given vide Rule 8 of the Draft SBO Rules is also not in line with the intent of law. The exemption provides that making declaration and maintaining of register of SBO will not apply where the registered holder is equity listed body corporate or a WoS of such body corporate or a foreign listed company. While we try to understand this exemption, the question that comes in our mind is that are we trying to say that listed body corporates do not have SBOs. Well the answer to this question may or may not be positive. Hence, the idea behind such carve out is vague.

Conclusion

Undoubtedly,  the  Draft SBO Rules’’ were awaited and while they have come out, the same is surely a stepping stone in implementing the changes under section 89 and 90, however, due to some ambiguities in such rules as discussed above, clarity on the grey areas is still required. We are hopeful that MCA will take care of the unclear portions in the said rules when the final version comes to life.


To read our other write-ups on the Companies (Amendment) Act, 2017 – Click here

To read our other resources – Click here


[1] http://www.mca.gov.in/Ministry/pdf/DraftRulesBeneficialOwnership_15022018.pdf

PAS-3 for privately placed issuance: “Unless” v/s “until”

CS Vinita Nair, Partner, Vinod Kothari & Company

corplaw@vinodkothari.com

One of the major concerns arising from enforcement of Companies (Amendment) Act, 2017 is ensuring compliance of provisions of substituted Section 42. One of the provisions of Section 42 restricts utilization of monies received from subscribers of the privately placed issue unless allotment is made and the return of allotment is filed with the Registrar in accordance with sub-section (8). This article critically analyses the aforesaid restriction, its consequences and the need to amend the same. Read more

MCA gears up for curtain raiser of SBO

Issues draft rules on Section 89 and 90

CS Vinita Nair, corplaw@vinodkothari.com

Amendment to Section 89 and 90 is one of the key amendments proposed in Companies (Amendment) Act, 2017 (Amendment Act). While, the Amendment Act is being enforced in phases, stakeholders have been awaiting the draft rules in relation to Significant Beneficial Ownership (SBO). MCA on 15.02.2018 issued draft Companies (Beneficial Interest and Significant Beneficial Interest) Rules, 2018[1] which is open for public comments till 07.03.2018. Read more

SEBI qualifies QIP for achieving MPS

By Chahat Jain (corplaw@vinodkothari.com)

Compliance with MPS requirement will no longer be a pre-requisite in order to be eligible to undertake Qualified Institutional Placement.

SEBI, in its board meeting held on December 28, 2017[1] decided to introduce Qualified Institutions Placement (QIP) and Sale of shares up to 2% held by promoters/promoter group in open market, subject to certain conditions, to enable listed companies to comply with the MPS requirement. It also approved necessary amendments in SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (“ICDR Regulations”).

Accordingly, SEBI vide notification no. SEBI/LAD-NRO/GN/2018/01 dated February 12, 2018[2] amended regulation 82 of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 ICDR Regulations thereby omitting clause (c) which provided as under:

‘it is in compliance with the requirement of minimum public shareholding specified in the Securities Contracts (Regulation) Rules, 1957’

In addition to the above circular, SEBI vide circular SEBI/HO/CFD/CMD/CIR/P/43/2018 dated February 22, 2018[3] has specified the following conditions for open market sale:

  1. the listed entity shall, at least one trading day prior to every such proposed sale, announce the following details to the stock exchange(s) where its shares are listed:
    • the intention of the promoter/promoter group to sell and the purpose of sale;
    • the details of promoter(s)/promoter group, who propose to divest their shareholding
    • total number of shares and percentage of shareholding proposed to be divested
    • the period within which the entire divestment process will be completed.
  2. The listed entity shall also give an undertaking to the recognized stock exchange(s) obtained from the persons belonging to the promoter and promoter group that they shall not buy any shares in the open market on the dates on which the shares are being sold by promoter(s)/promoter group as stated above.
  3. The listed entity, its promoter(s) and promoter group shall ensure compliance with all applicable legal provisions including that of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 and Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

Background

Rule 19A of Securities Contracts (Regulation) Rules, 1957 stipulates every listed entity to maintain a public shareholding of 25%. Listed public sector companies have been provided additional time till August 21, 2018 to comply with the requirements.

Accordingly, listed entities that have a public shareholding of less than 25% are required to adopt any of the following methods to comply with the MPS requirements as stipulated by SEBI vide circular no. CIR/CFD/CMD/14/2015[4] dated November 30, 2015:

  1. Issuance of shares to public through prospectus;
  2. Offer for sale of shares held by promoters to public through prospectus
  3. Sale of shares held by promoters through the secondary market in terms of SEBI circular CIR/MRD/DP/05/2012 dated February 1, 2012
  4. Institutional Placement  Programme  (IPP)  in  terms  of  Chapter  VIIIA  of  SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009
  5. Rights Issue to public shareholders, with promoter/promoter group shareholders forgoing their entitlement to equity shares,that may arise from such issue
  6. Bonus Issues    to    public    shareholders,    with    promoter/promoter    group shareholders  forgoing  their  entitlement  to  equity  shares,that  may  arise  from such issue
  7. Any other method as may be approved by SEBI on a case to case basis. For this purpose, the listed entities  may  approach  SEBI  with  appropriate  details.  SEBI would  endeavor  to  communicate  its  decision  within  30  days  from the  date  of receipt of the proposal or the date of receipt of additional information as sought from the company.

SEBI based on several applications received by it from listed entities seeking relaxation under method (vii), proposed two additional methods through its memorandum[5] to achieve minimum public shareholding (MPS) requirements by listed entities.

As provided in the press release relating to SEBI’ board meeting, QIP offers a quick solution to listed entities enabling them to meet MPS requirements apart from meeting their funding requirements. Also, sale of a certain small percentage of shares through open market will facilitate quicker and cheaper compliance for listed entities where promoters hold shares marginally above the threshold limit.

Conclusion:

This is surely a welcome move as listed entities contemplating to undertake QIP for achieving MPS will not be required to now approach SEBI for specific approval. Additional method of open market sale is complementary. Conditions as specified by SEBI for open market sale are much befitting. Though the last resort of approaching SEBI for approval of any other method is still open for listed entities. A circular amending the rule 19A of the Securities Contracts (Regulation) Rules, 1957 can be expected to be rolled out soon.


[1] https://www.sebi.gov.in/media/press-releases/dec-2017/sebi-board-meeting_37183.html

[2] https://www.sebi.gov.in/legal/regulations/feb-2018/sebi-issue-of-capital-and-disclosure-requirements-amendment-regulations-2018_37851.html

[3] https://www.sebi.gov.in/legal/circulars/feb-2018/manner-of-achieving-minimum-public-shareholding_37953.html

[4] https://www.sebi.gov.in/legal/circulars/nov-2015/manner-of-achieving-minimum-public-shareholding_31141.html

[5] https://www.sebi.gov.in/sebi_data/meetingfiles/jan-2018/1515574564737_1.pdf