Non-compliance of Listing Regulations may lead to compulsory delisting

by Munmi Phukon ,(corplaw@vinodkothari.com)

Introduction and Background

SEBI, on May 3, 2018 came out with a Circular[1] (the “Circular” or “New Circular”) on uniform structure for imposing fines as a first resort for non-compliance with certain provisions of the Listing Regulations and the standard operating procedure (SOP) for suspension of trading. This circular is issued in supersession of the previous two Circulars dated November 30, 2015[2] (May Circular) and October 26, 2016[3] (June Circular) (collectively “Previous Circulars”) and shall be effective from the compliance periods ending on or after 30th September, 2018 i.e. from the quarter ending on the said date.

How is it different from the Previous Circulars?

Evidently, the Circular is a combination of the Previous Circulars. While the May Circular covered the details of fine for respective regulations and SOP for suspension of trading, it however, did not cover the manner of freezing of the shareholding of promoters and promoter group entities of the defaulting entity. Thereafter, the June Circular was issued providing the manner to be followed by the depositories for freezing of shareholding of promoters and promoter group entities which was to be read with the May Circular.

The primary differences between the Circular and the Previous Circulars seem to be the following:

  1. The Circular covers 18 regulations of the Listing Regulations as against only 4 regulations covered by the May Circular which were primarily concerned with filing of periodic reports;

 

  1. The Circular provides uniform fine structure for non- compliance while the May Circular segregated the fine structure based on an initial non- compliance and a subsequent and consecutive non- compliances. Further, there was additional fine structure based on the paid- up capital of the defaulting entity if the non- compliance continues for more than 15 days;

 

  1. The Circular provides for the freezing of entire shareholding as well as other securities holding of the promoter and promoter group while the May Circular covered only shareholding.

 

  1. The Circular requires the listed entity to place before the Board, the details of non- compliance and action taken by the stock exchange and informing about the comments made by the Board thereon to the stock exchange for public dissemination. This was not there in the Previous Circulars.

 

  1. Moving of the scrip of the listed entity to “Z” Category was required in case of two or more consecutive defaults made within 15 days of the date of notice of the stock exchanges which has now been aligned with the failure for two consecutive quarters.

Contents of the New Circular

The New Circular may be segregated into the following parts-

  1. Structure of fines to be imposed for each of the Regulations covered thereunder;
  2. Freezing the entire shareholding in the entity and other security holding in demat form of the promoter and the promoter group;
  3. Moving of scrip to ‘Z Category;
  4. Suspension of trading of securities;
  5. Revocation of suspension;
  6. Delisting of the entity.

Each of the aforesaid are described as follows:

Part A: Structure of fines to be imposed

The Circular covers 18 Regulations for which fine shall be imposed. Further, the fines shall be accrued till the date of compliance made by the listed entity. The table below contains the said Regulations and respective fines against each of them.

Sl. No. Regulation Fine

 

Remarks
1.        Regulation 6(1)-

Non-compliance with requirement to appoint a qualified company secretary as the compliance officer.

 

₹ 1,000 per day

 

New insertion.
2.        Regulation 7(1)-

Non-compliance with requirement to appoint share transfer agent.

 

₹ 1,000 per day New insertion.

 

3.        Regulation 13-

(1)  Failure to ensure that adequate steps   are   taken for expeditious redressal of investor complaints.

(3)  Non-submission  of  the statement on Shareholder complaints within the  period prescribed under  this Regulation or  under  any  circular issued  in  respect  of redressal  of investor grievances.

 

₹ 1,000 per day New insertion.

 

However, sub- regulations (2) & (4) have not been taken into consideration. Sub- regulation (2) is w.r.t registration on the SCORES platform. Since the Circular does not cover this clause, accordingly, the listed entities will still require to observe the requirements of SEBI Circular dated December 18, 2014[4] which entrusts the responsibility of ensuring compliance with same on the Board of the listed entity.

 

Further, sub- regulation (4) is related to sub- regulation (3) wherein the statement of shareholders complaint is required to be placed before the Board on quarterly basis.

 

4.        Regulation 17(1)

Non-compliance with the requirements pertaining to the composition of the Board including failure to appoint woman director.

 

₹ 5,000 per day New insertion. Non- compliance due to casual vacancies of directors shall also get covered in this.
5.        Regulation 18(1)

Non-compliance with the constitution of audit committee.

 

₹ 2,000 per day New insertion. Non- compliance due to casual vacancies of directors shall also get covered in this.
6.        Regulation 19(1)/ 19(2)

Non-compliance with the constitution of nomination and remuneration committee.

 

₹ 2,000 per day New insertion. Non- compliance due to casual vacancies of directors shall also get covered in this.
7.        Regulation 20(2)

Non-compliance with the constitution of stakeholder relationship committee.

 

₹ 2,000 per day New insertion.
8.        Regulation 21(2)

Non-compliance with the Constitution of risk management committee.

 

₹ 2,000 per day New insertion.
9.        Regulation 27(2)

Non-submission of the Corporate governance compliance report within the period provided under this regulation.

 

₹ 2,000 per day Previously there were different figures for the 1st and the subsequent non-compliances i.e. Rs. 1000 and Rs. 2000 respectively. But as per the new circular overall ₹ 2,000 per day will be charged.

 

10.   Regulation 29(2)/29(3)

Delay  in  furnishing  prior intimation about  the  meeting  of  the  board  of directors

 

₹ 10,000 per instance of non-

compliance per item.

 

Sub- regulation (2) is related to sub- regulation (1). Sub- regulation (1) enlists 6 items for which the prior intimation to stock exchange is required. Further, sub- regulation (3) provides 2 more items requiring prior intimation.

 

The fine shall be per item, per instance and also on lump sum basis. Therefore, day count shall not be applicable.

 

11.   Regulation 31

Non-submission of shareholding pattern within the period prescribed.

 

₹ 2,000 per day Previously there were different figures for the 1st and subsequent non-compliances i.e. Rs. 1000 and Rs. 2000 respectively. Further, for continuous non- compliance for more than 15 days, additional fine was provided of 0.1 % of paid up capital of the entity or ₹ 1 crore, lower. But as per the new circular overall ₹ 2,000 per day will be charged.

 

12.   Regulation 32(1)

Non-submission of deviations/ variations in utilization of issue proceeds.

 

₹ 1,000 per day New insertion.
13.   Regulation 33

Non-submission of the financial results within the period prescribed under this regulation.

 

₹ 5,000 per day Previously there were different figures for the 1st and the subsequent non-compliances. i.e. 5000 and 10000 rupees respectively. Further, for continuous non- compliance for more than 15 days, additional fine was provided of 0.1 % of paid up capital of the entity or ₹ 1 crore, lower.

 

As per the new circular overall ₹ 5,000 per day will be charged.

 

14.   Regulation 34

Non-submission of the Annual Report within the period prescribed under this regulation.

 

₹ 2,000 per day Previously there were different figures for the 1st and the subsequent non-compliances i.e. 1000 and 2000 rupees respectively. However, the initial fine was to accrue only if the non- compliance continues for 5 days or more unlike for other regulations wherein from the very first day the fines are imposed.

 

As per the new circular overall ₹ 2,000 per day will be charged.

 

15.   Regulation 39(3)

Non-submission of information regarding loss of share certificates and issue of the     duplicate certificates within the period prescribed under this regulation.

₹ 1,000 per day

 

 

 

 

 

New insertion.
16.   Regulation 42(2)

Delay in/ non-disclosure of record date along with the purpose thereof.

 

Regulation 42(3)

Failure/ delay in dividend declaration within prescribed timeline.

 

Regulation 42(4)

Non-compliance with ensuring the prescribed time gap between two record dates.

 

Regulation 42(5)

Non-compliance with fixing of book closure dates and ensuring the prescribed time gap between two book closures.

 

₹10,000 per instance of non-

compliance per item

 

New insertion.
17.   Regulation 44(3)

Non-submission of the voting results within the period provided under this regulation.

 

₹10,000 per instance of non-

Compliance

New insertion.
18.   Regulation 46

Non-compliance with norms pertaining to functional website and disclosure of information thereon.

 

1st step:

Advisory/warning letter per instance of non-compliance per item.

 

2nd step:

 

₹10,000 per instance for every

Additional advisory/ warning

letter exceeding the four advisory/ warning letters in a financial year.

 

The stock exchange shall circulate advisory or warning letter as a first course of action. If such letter is sent for more than 4 times in a financial year, a lump sum of rupees 10000 shall be paid by the entity as fine for every such instances per item. This is to be noted that the Regulation enlists 17 items.

 

All of the aforesaid fines shall accrue till the time of rectification of the non- compliance to the satisfaction of the concerned recognized stock exchange or till the scrip of the entity is suspended from trading for non-compliance with the aforesaid provisions.

Part B: Freezing of shareholding and security holding of the promoter and the promoter group

Review of compliance by stock exchange

The New Circular provides for review of compliance status of the listed entities by the stock exchanges based on the receipt of information. However, the same is not clear on what will constitute an information or who will provide such information. If the term ‘information’ is to mean those information which are required to be submitted by the listed entities, the requirement will be incomplete as the regulations covered aforesaid do not only related to submission of information but also certain other compliances such as, disclosure of information on the website. In this regard, the May Circular was clear on the fact that the review by stock exchanges shall be based on the due date for compliances of respective regulations which should have retained in the new Circular too.

Notice in view of compliance status

Based on the review of compliance status of the entities, the stock exchange shall send notice to the concerned entity to comply with the relevant regulation and pay fine within 15 days. Such notice shall also be forwarded to other stock exchanges where the shares of the entity are listed.

Freezing

Upon failure to comply with the requirements of the notice, the depositories shall be approached by the stock exchange to freeze the shareholding of the promoters and promoter group in the concerned entity and also of the holding in other securities in the demat accounts. This is to be noted that the May Circular did not cover other security holdings.

Unfreezing

If the non-compliant listed entity pays the fine levied, the same shall be displayed on their website by the concerned stock exchange. The stock exchange shall also intimate the depositories to unfreeze the shareholding and security holding after one month from the date of compliance.

Duties of Board of Directors of the listed entity

The Board of Directors (BoD) of the listed entity has been entrusted with the duty to review the nature of the non- compliance and to comment thereon. The comments of BoD shall also be intimated to the stock exchanges.

Part C: Moving of Scrip to ‘Z Category

Which all regulations are covered?

The stock exchange, in addition to the imposition of fine, shall also move the scrip of the listed entity to ‘Z Category’. In that case the share shall be traded only on ‘trade for trade’ basis. However, this is applicable only for certain regulations and that too on failure to comply with the requirements of those regulations for two consecutive quarters. The regulations covered hereunder are as follows-

  1. Regulation 17(1);
  2. Regulation 18(1);
  3. Regulation 27(2);
  4. Regulation 31;
  5. Regulation 33;
  6. Regulation 34;
  7. Submission of information on  the  reconciliation  of  shares  and capital audit report;
  8. Receipt of  the  notice  of  suspension  of  trading  of  that  entity  by  any other recognized stock exchange on any or all of the above grounds.
Prior intimation to the investors

The stock exchange shall give 7 days prior public notice to the investors before moving the scrip to Z category along with simultaneous intimation to the other stock exchanges.

Moving back of the scrip

The stock exchange shall move back the scrip to normal trading category on compliance with respective provisions and payment of relevant fines thereof. However, the same can be done only if the trading has not been suspended. Other stock exchanges shall also be intimated by the stock exchange.

Part D: Suspension of trading of securities

The regulations for taking action of suspension of trading are same as provided in Part C above.

Procedure of suspension

Before suspension, a written notice shall be sent to the non-compliant listed entity in order to pay the appropriate fine within 21 days of the date of intimation. A public notice shall be placed on the website of the recognised stock exchange providing details of the same. The recognised stock exchange shall also inform other recognised stock exchange where the securities are listed in order to ensure uniformity in case of suspension.

If the entity fails to comply with the respective requirements and pay fine within the stipulated period, the trading in the shares shall be suspended. The entire shareholding and security holding of the promoter and promoter group shall remain frozen during the period of suspension.

Uniform suspension

While suspending trading in the shares of the non- compliant entity, the stock  exchange(s) shall  send  intimation  of  suspension  to other  stock  exchange(s)  where  the  shares  of  the  non- compliant  entity  are  listed to  ensure  that  the  date  of  suspension  is uniform across all the recognised stock exchange(s).

If the fine is paid before suspension

If the fine is paid within two working days before the proposed date of suspension, the suspension of securities shall not take place and public notice to this effect shall be published on the website of the stock exchange. Other stock exchange shall also be intimated of the same.

Further, the stock exchange shall also intimate the depositories to unfreeze the entire shareholding and security holding of the promoter and promoter group so frozen earlier. However, the shareholding and security holding shall be unfreezed only after one month from the date of compliance.

Post suspension trading

After 15 days of suspension, trading in the shares of the entity may be allowed on a ‘Trade for Trade’ basis. Such trading shall be allowed on the first trading day of every week for 6 months. Necessary instruction in this regard shall be issued by the stock exchange to the trading members.

Part E: Revocation of suspension

When revocation happens?

If the non-compliant entity complies with the requirements and pays the fine post suspension of trading in the shares, the stock exchange shall revoke the suspension and a public notice in this regard shall be displayed on its website informing about the same. The revocation of suspension shall be made after 7 days from the date of the notice and also inform other stock exchanges where the shares of the entity are listed.

Trading post revocation

After such revocation of suspension, the trading of shares shall be permitted only in ‘Trade for Trade’ basis for a period of 7 days from the date of revocation and thereafter, trading in the shares of the entity shall be shifted back to the normal trading category.

Unfreezing of share and security holding of promoter and promoter group

The  stock  exchange(s)  shall  intimate  the  depositories to unfreeze the entire shareholding of the promoter and promoter group in the entity as well as all other securities held in the demat account of the promoter and promoter group, after three months from the date of revocation of the suspension.

Part F: Compulsory delisting of the company

If the non-compliant entity fails to adhere to the requirements of the New Circular or fails to pay the applicable fine within 6 months from the date of suspension, the process of compulsory delisting of the non-compliant listed company will take place which will be commenced by the stock exchanges in accordance with the provisions of the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009 read with the Securities Contracts (Regulation) Act, 1956, the Securities Contracts (Regulation) Rules, 1957 as amended from time to time.

Conclusion

Evidently, the New Circular is more stringent than the Previous Circulars in many ways. Earlier, only shareholding of the promoters and promoter group in the listed entity were covered for freezing while the New Circular covers other security holding also. Accordingly, this shall include the debt securities, preference shares etc. held in the listed entity as well as in other entities if held in demat form. Further, the Board of Directors has been entrusted with an additional duty to review the compliance status and to provide comments thereon. The non- compliance for 6 months shall also lead to compulsory delisting of the listing entity. Accordingly, the Compliance Officer of the listed entity shall have to observe all these requirements to avoid the stringent consequences.


[1] https://www.sebi.gov.in/legal/circulars/may-2018/non-compliance-with-provisions-of-sebi-listing-obligations-and-disclosure-requirements-regulations-2015-and-standard-operating-procedure-for-suspension-and-revocation-of-trading-of-specified-securi-_38841.html

[2] https://www.nseindia.com/content/equities/SEBI_Circ_30112015_6.pdf

[3] https://www.nseindia.com/content/equities/SEBI_Circ_26102016.pdf

[4] https://scores.gov.in/scores/Docs/Circular%20-%20Redressal%20of%20Investor%20Grievances%20through%20SCORES.pdf

ROC goes fishing for companies with subsidiaries beyond two layers

Munmi Phukon, Principal Manager, Vinod Kothari & Company (corplaw@vinodkothari.com)

The country had witnessed the bulk of show cause notices sent to companies last year seeking evidence on their CSR expenditure, reporting, disclosure etc., though the Ministry’s stand on such notices and replies thereof is not yet known. After CSR, MCA has now seemed to shift its surveillance to the layers of Indian companies and recently started issuing show cause notices to the companies. As claimed in such notice itself, the basis of the same is the annual return filed by the companies. What concerns the most at this time is that, when most of the companies in the country are busy with convening the ensuing AGMs, the preparation/ documentation of bulky reports, aligning themselves with the recent amendments made in the corporate laws, be it the Companies (Amendment) Act, 2017 or the Listing Regulations, the show cause notice is posing as an additional burden. Read more

Sections not yet enforced of Companies (Amendment) Act, 2017

Deepam Shah

corplaw@vinodkothari.com

Sr. No Companies (Amendment) Act, 2017 Corresponding section of Companies Act, 2013 Amendment pertains to
1. 5 7 an affidavit a declaration from each subscribers to MOA and first directors.

 

2. 6 12 Notice of situation or change of situation of registered office within fifteen thirty days of incorporation/change.

 

3. 10 42 Private Placement of securities.

 

4. 15 73 1. Deposit repayment reserve account

(i) 15%  20%

(ii) Only for deposits maturing during following financial year

(iii) on or before 30th April each year

 

2. Deposit Insurance – no longer required.

 

3. Eligibility for defaulting companies – if company makes good the default and 5 years elapsed from last date of making good the default.

 

5. 16 74 Repay within 3 years from commencement of this act i.e. maximum by 31.03.2017 or such other earlier expiry date whichever is earlier. Provided renewal of deposit shall take place by complying CHP V and rules made thereunder

 

6. 20 82 An additional 270 (total of 300) days will be available to file Form CHG-4 with payment of additional fees

 

7. 21 (except clauses (i) and (ii) ) 89 Beneficial interest has been explained as right to exercise voting right/ right to participate in dividend/ such other distribution thereby widening the meaning of beneficial interest to cover a pledge of shares with a right to usufruct to the pledgee. This section is not applicable to government companies

 

8. 22 90 Identification of significant beneficial owners of the company, intimating the same to Registrar and maintaining register of the same.

 

 

9. 23 (except clauses (iii) & (iv) ) 92 1. Disclosure of indebtedness need not be made in annual return;

 

2. No need to specify additional details of shares held by FIIs;

 

3. CG may prescribe abridged form of annual return for OPC, Small companies and certain other classes of companies;

 

4. Doing away with MGT-9. Placing of annual return on the website and disclosing its link in Board’s report;

 

10. 24 93 Form MGT-10 need not be filed by listed company;

 

11. 25 94 Only SR is required in case registers and copies of annual return are to be kept in any other place in India where  more than 1/10th of total no of member resides.

 

12. 26 96 An unlisted company can obtain consent of all members in advance, either in writing/electronic means and hold AGM at any place in India.

 

13. 36 134 1. CEO will be required to sign Board Report irrespective of whether he is a director or not;

 

2. Instead of annexing MGT-9 in Board Report, web address if any to be provided where complete annual return has been placed;

 

3. To disclose the manner in which annual performance evaluation has been carried out;

 

4. Disclosures already made in financial statements need not be provided in Board Report;

 

5. Providing web-link of policies such as CSR, NRC etc.;

 

6. CG may prescribe abridged form of annual return for OPC, Small companies and certain other classes of companies.

14. 37 135 1. Clarification already existed under CSR Rules relating to no appointment of independent director in CSR committee in case appointment of ID u/s 149(4) not applicable to company;

 

2. Rectification relating to areas/ subject specified in Schedule VII;

 

3. To substitute ‘average net profit with ‘net profit’.

 

15. 66 196 Company can make application to CG even if resolution for appointing MD is passed with simple majority instead of special resolution;

 

16. 67 197 Managerial Remuneration – doing away with requirement of seeking approval of Central Government.

 

17. 68 198 1. For an investment company premium on shares/ debentures issued/ sold shall form part of the normal profits generated from its ordinary business and not of capital nature;

 

2. In calculation of section 198 profit & free reserves credit shall not be given to unrealized gains, notional gains or revaluation of assets;

 

3. It shall allow the adjustment of b/f losses incurred prior to the Act,2013 .

18. 69 200 1. Approval of CG not required in case of payment of remuneration to managerial personnel;

 

2. The title of the section to be amended as ‘COMPANY TO FIX LIMIT WITH REGARD TO REMUNERATION’

19. 70 201 As requirement of obtaining CG approval has been done away with reference of section 96 shall be inserted;

 

20. 71 216 For the purpose of investigation of ownership the persons having beneficial interest in shares or beneficial owners or significant beneficial owners shall be considered.

 

21. 75 366 A company under this section can get itself registered with two or more members too as a private company.

 

22. 76 374 LLPs will not be required to file any affidavit/undertaking with ROC.

 

23. 77 379 Sections 380-386, 392, 393 shall apply to all foreign companies provided Central Government may exempt certain class of foreign companies.
24. 78 384 It covers a foreign company within the purview of section 135 (clarification)
25. 79 391 This section is only applicable to a foreign company having pending repayment/redemption of money raised through issue of securities o’wise such foreign companies are required to follow sections 355, 376 & 377 in case of no such pendency.

 

26. 80 (except first proviso to clause (i) & clause (ii) ) 403 1.      Any document/fact/information other than referred to in first proviso be submitted/filed/registered/recorded on payment of additional fee;

 

2. In case of default for two or more occasions the document/fact/information be submitted/filed/registered/recorded on payment of higher additional fee which shall not be less than twice the additional fee;

27. 81 406 1. A company will be treated as Nidhi or a Mutual Benefit Society only on declaration made by CG by notification in Official Gazette;

 

2. A copy of every notification proposed to be issued under sub-section (2), shall be laid in draft before each House of Parliament, while it is in session as specified;

 

3. The copies of every notification issued under this section shall, as soon as may be after it has been issued, be laid before each House of Parliament.

Alignment of Audit & Auditors Rules with Amendment Act, 2017

Relatives’ interest affecting the independence criteria of IDs

By Munmi Phukon & Smriti Wadehra (corplaw@vinodkothari.com)

Introduction

The Ministry, on 7th May, 2018[1], has come out with certain changes in some of the Rules prescribed under the Companies Act, 2013. One of such changes has been made in the Companies (Appointment and Qualification of Directors) Rules, 2014. The amendment is being made under Rule 5 of the said Rules which pertains to qualification of independent directors (IDs) considering the enforcement of the changes in section 149(6)(d) brought by the Companies (Amendment) Act, 2017 w.e.f the aforesaid date.[2] Read more

Flexible MBP rules come to life pursuant to Amendment Act, 2017

By Pammy Jaiswal (pammy@vinodkothari.com),(corplaw@vinodkothari.com)

Introduction

MCA vide its notification dated 7th May, 2018[1] has enforced another set of 28 sections of the Companies (Amendment) Act, 2017 (‘Amendment Act’). The notification has enforced sections primarily dealing with the definition of associate company, doing away with ratification of auditors, charge registration, delay in filing of returns along with additional fees, annual return, etc.

With the third set of enforcement notification, MCA has made corresponding changes in the following Companies Rules under the Companies Act, 2013 (‘Act, 2013’)[2].

  • Companies (Meeting of the Board and its Powers) Rules, 2014 (‘MBP Rules);
  • Companies (Prospectus and Allotment of Securities) Rules, 2014 (‘PAS Rules’);
  • Companies (Appointment and Qualification of Directors) Rules, 2014 (‘AQD Rules’);
  • Companies (Audit and Auditors) Rules, 2014 (‘AA Rules’);
  • Companies (Share Capital and Debenture) Rules, 2014 (‘SCD Rules’); and
  • Companies (Specification of Definition and Details) Rules, 2014.

This write up compiles the changes brought in the following Companies Rules namely:

1.        MBP Amendment Rules, 2018[3]

 

Sr. No.

Matter Description

Prior to Amendment

 

Nature of Amendment

 

Impact of the Amendment

 

1. Participation of directors through VC mode for restricted items Section 173 of the Act, 2013 does not allow the participation of directors in board meetings for discussing certain matters in the nature of unpublished price sensitive information (‘UPSI’). Matters dealing with (i) the approval of annual financial statements; (ii) the approval of the Board’s report; (iii) the approval of the prospectus; and (iv) the approval of the matter relating to amalgamation, merger, demerger, acquisition and takeover are required to be approved in a duly convened board meeting without the participation of directors in video-conferencing mode.

 

In view of streamlining the provisions of the Amendment Act, rule 4 of the MBP Rules have been amended to allow the participation of the directors through VC even for the restricted matters provided the directors physically present form the requisite quorum for the meeting.

 

The intent of law for the bringing such amendment is to allow wider participation of directors and provide flexibility in terms of mode of participation.

 

The matters for which VC has now been enabled are matters in the nature of UPSI and therefore, the officer convening the meeting has to ensure that while using such mode of participation, confidentiality of the information is maintained.

 

2. Constitution of the Audit and the Nomination and Remuneration Committee Section 177 and 178 of the Act, 2013 requires the certain classes of companies to constitute audit committee and nomination and remuneration committee with independent directors forming majority and one-half of the total strength respectively. The law requires for constituting such committees for every listed company which also includes private listed companies.

 

However, MCA vide its notification dated 5th July, 2017 had waived the requirement of appointing an independent director in certain public companies viz. JV companies, WoS and a dormant company.

 

 

 

The requirement of constituting an audit committee and a nomination and remuneration committee shall be required for listed public companies only in addition to other classes of public companies.

 

Private companies which have their debt securities listed have now been explicitly exempted from constituting audit committee and nomination and remuneration committee.

 

The amendment is a clarificatory change and allows the private listed companies to uphold their privacy. However, relevant terms of reference of an audit and nomination and remuneration committee will any ways be looked after by the board or any sub-committee so constituted.

3. Passing of prior special resolution in case of crossing limits laid under section 186 Section 186 of the Act, 2013 requires passing of prior special resolution in case the limits laid under the said section are exceeded (60% of the PUSC, free reserves and securities premium account or 100 of free reserves and securities premium account, whichever is more). It further requires to state the upper limit upto which loans, guarantee, security or investment shall be made by the company. The details of such loans, guarantee, security or investment so made is required to be disclosed in the financial statements as well.

 

The amendment has done away with the requirement of obtaining prior special resolution for the said purposed in excess of the prescribed limits.

 

No impact, only the language has been altered.

2.        SCD Amendment Rules, 2018[4]

 

S.no Matter description

 

Prior to amendment Nature of amendment Impact of amendment
1. Issue of sweat equity shares

 

The expression of ‘employees’ for the purpose of issue of sweat equity shares by unlisted companies  meant a permanent employee of the company who had been working in or outside India, for atleast one year.

 

 

The Amendment Act, 2017 omits the requirement for a period of one year to elapse after the commencement of the business for the issue of sweat equity shares.

 

The amendment in the rules is in line with the aforesaid change and does away with the condition for an permanent employee in or outside India to be working for atleast one year.

 

In case of issue of sweat equity shares by unlisted companies they are required to comply with SHD Rules in this regard.

 

The issue of sweat equity shares can now be done to permanent employees working in or outside India, irrespective of their period of employment in the Company.

 

Conclusion

The amendment in the aforesaid rules is a reflex action pursuant to the enforcement of relevant section of the Amendment Act under the third phase (read our write-up here). The amendment under the MBP Rules is a welcome change and allows flexibility in business operations by a company.


[1] http://www.mca.gov.in/Ministry/pdf/CompaniesAmendmentNoti_07052018.pdf

[2] http://www.mca.gov.in/MinistryV2/companiesact2013.html

[3] http://www.mca.gov.in/Ministry/pdf/CompaniesBoardsPowersRules_07052018.pdf

[4]  http://www.mca.gov.in/Ministry/pdf/SharecapitalRule2018_11042018.pdf