New rules of corporate control: Limit on layers of subsidiaries

By CS Vinita Nair, (corplaw@vinodkothari.com)

MCA has issued a notification notifying the Companies (Restriction on Number of Layers) Rules, 2017[1], imposing a limit of two layers of subsidiaries which shall be effective from September 20, 2017[2]. Earlier, MCA vide public notice dated 1 June 28, 2017[3] had conveyed its intent of issuing a notification proposing amendments to the Companies (Specification of Definitions Details) Rules, 2014 containing the restriction on layers of subsidiaries beyond prescribed number and had invited suggestions on the draft notification. This write up initially discusses the conditions imposed and thereafter analyses the permitted combinations.

Proviso to Section 2 (87) along with explanation (d) was proposed to be omitted in Companies (Amendment) Bill, 2016. However, in view of reports of misuse of multiple layers of companies, where companies create shell companies for diversion of funds or money laundering, MCA has decided to retain the provisions and commence the aforesaid proviso and explanation. Further, MCA had no intent to exempt private companies from the requirement as well. Companies (Amendment) Bill, 2017 as passed by Lok Sabha omitted the amendment proposed in Proviso to Section 2 (87).

Figure 5 of Taxmann’s Your Queries on Companies Act, 2013

Exempted companies

Rule 2(2) of Companies (Restriction on number of layers) Rules, 2017 shall not apply to following classes of companies, namely:-

(a) a banking company;

(b) a non-banking financial company as defined in the Reserve Bank of India Act, 1934 (2 of 1934) which is registered with the Reserve Bank of India and considered as systemically important non-banking financial company by the Reserve Bank of India; (Nothing specified in relation to housing finance companies/ NBFC CICs).

(c) an insurance company being a company which carries on the business of insurance in accordance with provisions of Insurance Act, 1938 and Insurance Regulatory Development Authority Act, 1999;

(d) a Government company referred to in clause (45) of section 2 of the Act.

Exemptions in cases of Housing Finance Companies, Core Investment Companies as well as Non-Operative Financial Holding Company, Companies that become subsidiary entities pursuant to lenders acquiring majority of shareholding in the borrowing entity as a measure to deal with stressed assets in accordance with the guidelines issued by the Reserve Bank of India from time to time are missed out in the Rules notified.

Exempted subsidiaries – subsidiaries incorporated outside India

 

First proviso to Rule 2 of the Rules provides exemption to a Company from acquiring a company incorporated in a country outside India with subsidiaries beyond two layers as per the laws of such country.

The exemption in case of acquiring of subsidiaries incorporated outside India should be extended equally to subsidiaries freshly incorporated outside India. There need not be a distinction in acquisition and incorporation of subsidiary outside India. Either a company may acquire a subsidiary outside India which in turn has several layers of downstream investment or it may float a subsidiary outside India which will keep on further incorporating or acquiring subsidiaries outside India.

It cannot be interpreted that a Company incorporating subsidiaries outside India will have to adhere to the restriction of layers even if the same is permitted as per law of that country.

Exempted subsidiaries – wholly owned subsidiaries

One layer which consists of one or more wholly owned subsidiary or subsidiaries shall not be taken into account while computing the number of layers. The proposed Rule provided the explanation to the effect that one layer which is represented by a wholly owned subsidiary shall not be taken into account.

‘Layer’ cannot mean ‘Layers’ based on interpretation that singular includes plural. Therefore, it should not be read as any layer represented by a wholly owned subsidiary. The whole purpose will get defeated if companies are allowed to incorporate layers of wholly owned subsidiaries without any restriction.

It is very pertinent to ponder whether the wholly owned subsidiaries can be at layer not immediately following the layer of holding company.

Example 1: Company ‘A Ltd’ has a subsidiary ‘B Ltd’ which in turn has a subsidiary ‘C Ltd’. ‘C Ltd’ forms a wholly owned subsidiary ‘D Ltd’. How can Company ‘A Ltd’ avail the exemption for the layer represented by ‘D Ltd’ which is not wholly owned subsidiary of ‘A ltd’.

Example 2: Company ‘A Ltd’ has wholly owned subsidiaries ‘B Ltd’ and ‘C Ltd’. Both of these wholly owned subsidiaries hold shares in ‘D Ltd’ in the ratio of 60% and 40% respectively. Thereafter, ‘D Ltd’ forms a subsidiary ‘E Ltd’. In this case, the layer represented by ‘B Ltd’ and ‘C Ltd’ shall not be considered.

Therefore, the layer of wholly owned subsidiary has to reflect in the first layer and not thereafter in order to avail the exemption.

Limit prescribed under Section 186 (1)

Similar restriction on number of layers of investment companies has already been in force under Section 186 (1).  The provisions of this rule shall not be in derogation of the proviso to sub-section (1) of section 186 of the Act.

Rules are prospective in nature

The holding companies, other than exempted companies, that breach the conditions of layers of subsidiaries as on the date of commencement of provision are prohibited from incorporating additional layer of subsidiaries.

Such holding companies shall file return in Form CRL-1 with the Registrar within a period of 150 days from the date of publication of these rules in Official Gazette. The form requires specifying layer number of the subsidiary and percentage of shares held by holding company.

The Rules further provide that, such Company shall not, in case one or more layers are reduced by it subsequent to the commencement of these rules, have the number of layers beyond the number of layers it has after such reduction or maximum layers allowed in sub-rule (1), whichever is more.

No restriction on horizontal propagation

All the below mentioned structures are permitted and well in compliance

Figure 9 of Taxmann’s Your Queries on Companies Act, 2013

Figure 9 of Taxmann’s Your Queries on Companies Act, 2013

Permitted and prohibited combinations

Case 1:

Figure 8 of Taxmann’s Your Queries on Companies Act, 2013

In the aforesaid structure, if we consider on as is basis, there exists more than 2 layers of subsidiaries. Therefore, an existing company cannot go beyond ‘D’. Once the provisions are enforced, an existing holding company A will not be able to float ‘D’ unless any exemptions/ relaxations become applicable.

 

Case 2 – ‘B’ is a wholly owned subsidiary of ‘A’:

In that case, the structure is permissible.

Case 3 –’C’/ ‘D’[1] is a wholly owned subsidiary of ‘A’:

In that case, the structure is not permissible for reasons stated above.

Case 4 – ‘B’/’C’ is a subsidiary incorporated outside India:

Currently, the wording of draft rule prescribes ‘acquired’ subsidiaries to be exempted. However, there is no reason to infer that the benefit cannot be extended to subsidiaries incorporated outside India if the laws of host country permit the same.

Case 5 – ‘B” is a subsidiary acquired outside India while ‘C’ and ‘D’ and subsidiaries of ‘B’ incorporated in India

So ‘A’, ‘C’ and “D’ are companies incorporated in India while ‘B’ is a subsidiary outside India. The exemption cannot be extended to ‘C’ and ‘D’ merely because it’s immediately holding company is a subsidiary acquired outside India. Therefore, the limit is likely to be breached unless ‘B’ or ‘C’ or ‘D’ is a wholly owned subsidiary.

Case 6‘A’/‘B’/’C’ fall under exempted companies:

In that case, the restriction shall not apply.

Case 7 – ‘B’/’C’/ ‘D’ is an LLP:

The expression ‘company’ includes body corporate. Therefore, an existing company cannot go beyond ‘D’. Once the provisions are enforced, an existing holding company A will not be able to float ‘D’ unless any exemptions/ relaxations become applicable.

[1] Either of ‘C’ or ‘D’

Onus of non-compliance

Figure 7 of Taxmann’s Your Queries on Companies Act, 2013

If any company contravenes any provision of these rules the company and every officer of the company who is in default shall be punishable with fine which may extend to ten thousand rupees and where the contravention is a continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which such contravention continues.


[1] http://egazette.nic.in/WriteReadData/2017/179104.pdf

[2] http://egazette.nic.in/WriteReadData/2017/179105.pdf

[3] http://www.mca.gov.in/Ministry/pdf/Notice_29062017.pdf

[4] Either of ‘B’ or ‘C’ or ‘D’

Slaying the slain: the law about strike-off of companies

By Nikita Snehil, (corplaw@vinodkothari.com)

Striking off of the names of companies for having remained inoperative has been a concept which has always been there, both under the 1956 Act, and under the 2013 Act. Striking-off of defunct companies is a provision in law for chopping the dead wood – if the company has lost its substratum, and there is nothing in the company, then the long process of winding up is not relevant for the company, and the RoC can strike off the name of the company as if the company never existed. Striking-off of companies is an option that exists both with the company, and with the RoC.

However, the recent massive clean-up operation, whereby RoCs started issuing public notices[1] in April, 2017 to strike off the name of the companies from the register of companies and to dissolve them unless a cause is shown to the contrary, within thirty days from the date of the notice, has come to centre of focus. Thereafter, on September 5, 2017 the government confirmed that names of over 2.09 lakh companies have been struck off from the Register of Companies for failing to comply with regulatory requirements.

There are several words which are doing rounds currently – defunct companies, shell companies, benami companies, and so on. They all mean completely different things. Defunct company is what the Companies Act talks about – a company which is left with no substance; it is either inoperative, or has no assets or liabilities. The word “shell company”, commonly used in tax parlance, refers to such companies which are merely a shell, that is, hiding the identity of the real owners. Obviously, the current environment of the drive against black money suggests that the word has been used to refer to companies which might have been used for money-laundering. The word benami company might have similar connotations.

However, the Companies Act term “defunct” companies never really smelled about money laundering or a device to shield the identity of real owners. Therefore, over the years, the concept has been innocuous. In the current environment, however, the various expressions above have all been mixed up, as if to conclude that defunct companies were being used for money-laundering. If the company is really defunct, and there is no substance into it, it seems paradoxical to relate it to money laundering operations. The fact that there is no real asset or no real liability should mean that there is nothing in the company, including any evidence of untaxed wealth. However, the confusion between defunct companies and black money is quite evident in the MCA press release[2] issued on September 6, 2017 said that the action of the MCA “would not only help in checking the menace of black money” but would help the ease of doing business in India. The Press Release also sounded like a shock to the directors of such struck-off companies, as it said 3 important points:


This article endeavours to understand the provisions of the law about striking off of names of companies and the impact thereof on directors’ disqualifications.

Enabling provision of the law

As per Section 248 of the Companies Act, 2013 (‘Act’) which deals with the power of Registrar to remove name of company from register of companies:

“(1) Where the Registrar has reasonable cause to believe that—
(a) a company has failed to commence its business within one year of its incorporation;

(b) [omitted]

(c) a company is not carrying on any business or operation for a period of two immediately preceding financial years and has not made any application within such period for obtaining the status of a dormant company under section 455,

he shall send a notice to the company and all the directors of the company, of his intention to remove the name of the company from the register of companies and requesting them to send their representations along with copies of the relevant documents, if any, within a period of thirty days from the date of the notice.”

Therefore, though the public notice issued by the RoC stated the reference of Section 248 of the Act, it is pertinent to note that the said Section empowers the RoC to strike the names of the Companies only in two cases. But almost all the shell companies does not seem to have triggered any of the above two conditions.

Section 248 Vs Section 455 of the Act

Another section which empowers RoC to remove the name of a company from the register of members is Section 455 of the Act. As per the provisions of Section 455 of the Act, which deals with the provisions of dormant company:

“(4) In case of a company which has not filed financial statements or annual returns for two financial years consecutively, the Registrar shall issue a notice to that company and enter the name of such company in the register maintained for dormant companies.

(5) A dormant company shall have such minimum number of directors, file such documents and pay such annual fee as may be prescribed to the Registrar to retain its dormant status in the register and may become an active company on an application
made in this behalf accompanied by such documents and fee as may be prescribed.

(6) The Registrar shall strike off the name of a dormant company from the register of dormant companies, which has failed to comply with the requirements of this section.”

The section states the following procedure to be adopted by the the dormant company and the RoC:

(a) RoC may remove the name of an inactive company from the register of members and put the same in the register of dormant companies.
(b) The dormant company shall then comply with the requirements and retain its dormant status or make an application to become an active company.
(c) Thereafter, if the dormant company fails to comply with the requirements of the section, then the RoC can finally remove the name of such company from the register of dormant company as well.

However, in the current situation, the above mentioned procedure is not followed by the RoCs and names of the companies are directly struck off from the register of members.

Hence, there does not seems to be an enabling section under which the RoC has struck off the names of the companies.

Vacation of office of Directors

As per the Press release issued by MCA, the next move of MCA will be to compel the Directors of such shell companies which have not filed returns for three or more years to vacate the office.

Provisions of law:

Section 164 (2) of the Act, which deals with the disqualifications of appointment of directors, provides the following:

“No person who is or has been a director of a company which—

(a) has not filed financial statements or annual returns for any continuous period of three financial years; or

(b) has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay interest due thereon or pay any dividend declared and such failure to pay or redeem continues for one year or more,

shall be eligible to be re-appointed as a director of that company or appointed in other company for a period of five years from the date on which the said company fails to do so.”

Further, Section 167(1)(a) of the Act directs that the office of a director shall become vacant in case he incurs any of the disqualifications specified in section 164 of the Act.

Therefore, reading both the sections, it can be concluded that, the directors of such companies will:

1. have to vacate their office, due to the disqualification incurred;

2. not be able to be re-appointed as a director of that company;

3. not be eligible to be appointed in any other companies as well.

The second and third effect will last upto a period of five years from the date on which the said company fails comply with the provisions of section 164 (2) of the Act.

Having said so, there arises a further question:

‘Does disqualification to section 164(2)(b) of Act will also apply to directors newly appointed in the company?’

It is important to note the starting lines of section 164(2)(b), which read as follows:

“No person who is or has been a director of a company which xxX”

Thus, to attract disqualification under section 164(2)(b), it is important that the individual has to be on the board of the company when the default actually happened.

Therefore, even new directors of such company will attract the disqualification, inspite of the fact that they were not at all involved in such non-compliance. Basically, the intent of law might be to deter companies from defaulting, which would demotivate any new director to join the company.

Applicability of the law – prospective or retrospective?

Sections 164 and 167 came into force on April 1, 2014. However, the disqualifications under Section 164 (2) cannot become applicable as on April 1, 2014 for any annual filings not done in any of the previous financial years. The provisions were initially inapplicable to private companies. Section 164 (2) curtails the right of directors of such companies to continue as directors, casts a new burden, imposes a new liability on such directors for having defaulted in filing financial statements for any 3 continuous financial years.

It was discussed in the Supreme Court Judgment in case

of Maharaja Chintamani Saran Nath … vs State Of Bihar And Ors on 7 October, 1999[3] that the true principle is that Lex prospicit non respicit (law looks forward not back). As Willes, J. said, retrospective legislation is `contrary to the general principle that legislation by which the conduct of mankind is to be regulated ought, when introduced for the first time, to deal with future acts, and ought not to change the character of past transactions carried on upon the faith of the then existing law.

However, in the recent case law of “Vikram Ahuja Vs. Greenstone Investments Pvt. Ltd. and ors., before the NCLT, Mumbai Bench, decided on November 11, 2016”[4], one of the point for discussion and decision before the Hon’ble bench was:

“whether the disqualification set forth in Section 164(2)(a) read with 167(1) (a) of the Act has retrospective effect or not?”.

The Hon’ble Tribunal, after considering various case laws considered that “this provision has to be read as applicable to the situations where non-filing has started, at the most in the past and continuing while this enactment has come to into existence and also to future non-filing”. Also, it has been provided that, the statute providing posterior disqualification on past conduct does not become a retrospective one because a part of a requisition for its action is drawn from a time antecedent to its passing.

Therefore, the applicability of the Section, whether retrospective or prospective is still debatable.

Legal position of the company after strike-off

By virtue of a legal process, a company is born as a separate legal entity, so is its death process. In case of dissolution of a company pursuant to the company’s name being removed from the Register by the ROC in terms of Section 248 of the Act, the corporate status of an entity ceases to subsist, its functionality stops and for all practical purposes corporate activities come to an end.

Liability of directors

The pertinent question that arises here is that whether the liability of directors and other officers of the company struck off from the records will continue and whether it could be enforced. The answer to this is yes.

The relevant clause of Section 248 of the Act provides the followings:

“(7) The liability, if any, of every director, manager or other officer who was exercising any power of management, and of every member of the company dissolved under sun-section (5), shall continue and may be enforced as if the company had not been dissolved.”

Accordingly, it can be drawn that notwithstanding the company’s dissolution, the liabilities of its directors and officers who exercised powers along with its members continue, remain unaltered and enforceable. However, the dissolution does not makes any enhancement to the enforcement of the liabilities affecting the personal capacity of the abovementioned persons.

A view can be taken that the dissolution under section 248 is not a state complete extinction. Instead it is a state of suspension for a period of twenty years from the date of dissolution, as upon the revival of the company, all its rights and liabilities are restituted with retrospective effect from the date of strike-off.

Assets of the company

Another concern for a company whose name has been struck-off by the ROC is that there may be properties and rights vested in or held on trust for the company, cash balances of the company and other current or non-current assets of the company while it was functional. The fate of such assets is a question to be addressed.

Section 352(2) and 352(7) of the Act deals with the unclaimed or undistributed estate of a company, but these sections becomes applicable where there is a liquidator involved in winding up of a company. In case a company is dissolved in pursuance of Section 248, there is no liquidator appointed. Hence, the operative part of Section 352 is not applicable in the dissolution of a company under Section 248.

A reference can be drawn from the Companies Act of England, which has a provision stating that the property of dissolved company shall be bona vacantia. The Escheat over which no one has a claim is known as bona vacantia. The term can be expressed as ‘abandoned property’ too. In bona vacantia there is no owner of the property and the State merely takes possession of the property, which is an abandoned one. In India there is no such corresponding provision in the Act. However, as per the laws in India, the property of an estate dying without leaving lawful heirs passes to the government by escheat or as bona vacantia. Similarly, it can be inferred that the property of a dissolved company shall also pass to the government by escheat or as bona vacantia, including any subsisting interest of the company on the date of dissolution.

Though, it can be established that the doctrine of bona vacantia will be applicable for a company dissolved under section 248, however, whether the same shall come into operation immediately or after a lapse of the prescribed time period of twenty years is a debatable matter.

Effect of company notified as dissolved

As per Section 250 of the Act, where a company stands dissolved under section 248, it shall on and from the date mentioned in the notice issued by RoC in the Official Gazette, shall cease to operate as a company and the Certificate of Incorporation issued to it shall be deemed to have been cancelled from such date except for the purpose of realising the amount due to the company and for the payment or discharge of the liabilities or obligations of the company.

Recent judgements:

NCLT, at its hearing of Principal Bench at New Delhi, on March 14, 2017, in the case of Poly Auto System Pvt. Ltd. Vs. RoC Delhi[5], held that the Registrar of Companies has to comply with the comprehensive procedural obligations before passing the final order of striking off the name of the company from the register of members. The casual approach of the RoC which would lead to abrupt conclusion will not be a legal act. And the Tribunal ordered for restoration of the name of the Company in the register of members.

Similarly, the present act of the government of striking off the names of more than 2 two lakh companies, seems not to consider the post effect of such dissolution.
So, it will be interesting to see how the assets and liabilities of the companies will be managed – will there be appointment of any liquidator? How will the liabilities of the creditors will be discharged? Will the balances of the cash rest with the government? These are the few questions which will have to be addressed by the government in the due course.

Remedial Action

Section 252 of the Act empowers the Tribunal, to pass an order for the restoration of company which has been struck off by the ROC, in the following manner:

(a) Appeal filed by any person:

Any person aggrieved by the order of the RoC may file an appeal before the Tribunal within 3 years of the order passed by RoC and if the Tribunal is of the opinion that the removal of name of company is not justified in view of the absence of any of the grounds on which the order was passed by the ROC, it may pass an order for restoration of the name of the company in the register of companies after giving a reasonable opportunity of making representations and of being heard to the ROC, the company and all the persons concerned. The genuine companies, which have been struck off, will move to file an appeal to the NCLT in this case.

(b) Application filed by ROC:

The ROC may, within a period of three years from the date of passing of the order dissolving the company under section 248, file an application before the Tribunal seeking restoration of name of such company if it is satisfied that the name of the company has been struck off from the register of companies either inadvertently or on the basis of incorrect information furnished by the company or its directors. Genuine companies may make representations to prove their innocence or bonafide reason of such non-filings, pursuant to which RoC may on valid reasons but within a period of three years, restore the name of such companies.

(c) Application filed by company or any member or creditor or workmen:

The Tribunal, on an application made by the company, member, creditor or workman before the expiry of 20 years from the publication in the Official Gazette of the notice of dissolution of the company, if satisfied that:

1) the company was, at the time of its name being struck off, carrying on business or in operation; or
2) b) otherwise it is just that the name of the company be restored to the register of companies,

may order the name of the company to be restored to the register of companies. Further, the Tribunal may also pass an order and give such other directions and make such provisions as deemed just for placing the company and all other persons in the same position as nearly as may be as if the name of the company had not been struck off from the register of companies.

Therefore, in the present situation, it will be best for the genuine companies to make representations/ applications to the RoCs proving that the companies are not involved in any fraudulent activities or involved in syphoning of funds through illicit activities. The representations/ applications may convince the RoC to restore the names of the genuine companies.

 


[1] http://www.mca.gov.in/MinistryV2/roc.html

[2] http://pib.nic.in/newsite/PrintRelease.aspx?relid=170579

[3] https://indiankanoon.org/doc/1293868/

[4] http://nclt.gov.in/Publication/Mumbai_Bench/2016/397_398/Greenstone%20Investments%20Pvt.%20Ltd.%2022.11.2016_.pdf

[5] http://nclt.gov.in/interim_orders/principal/14.03.2017/Poly%20Auto%20Systems%20Pvt.%20Ltd..pdf

POWER TO ARREST AS PER COMPANIES ACT, 2013

By Smriti Wadehra, (corplaw@vinodkothari.com).

The Companies Act, 2013 (‘Act’) empowers the Central Government to inspect the books of accounts of a company, to direct special audit, to order investigation into the affairs of a company and to launch prosecution for violation of the Act. These inspections are designed to ensure that the companies conduct their affairs in accordance with the provisions of the Act, and there is no mismanagement which may adversely affect the interest of the stakeholders. It further also keeps a check on any unfair practices prejudicial to public interest that is being resorted to by any company or a group of companies.

In light of this and the rise in financial crime, the need for a specialised agency to do cutting edge investigation and ensure quick closure of cases was necessitated. Accordingly, section 212 was introduced in the Act, however, the provisions of section relating to Serious Fraud Investigation Office (SFIO), was notified only on 1st April, 2014 except sub-section (8) to (10). SFIO is a multi-disciplinary organisation, consisting of experts, for detecting and prosecuting or recommending for prosecution of white collar crimes and frauds.

The main intent of SFIO is to prosecute corporates liable for corporate offence under the Act. Since, the definition of offence was not very clear and references were provided to various sections of the Act, there was a need to clear the ambiguity in this regard. In this regard, Companies (Amendment) Act, 2015 substituted the references to the section of offences with “Offences covered under section 447 of the Act”[1].

POWER TO ARREST

Ministry has recently come out with a notification G.S.R. 1062(E)[2] dated 24th August, 2017 making the provisions of section (8) to (10) of section 212, applicable and bestowing the power to arrest on the Act. The provisions of the section specifically lays down that every Director, Additional Director or Assistant Director of SFIO, authorised by the Central Government may by general or special order, if it has reasons to believe on the basis of material in his possession that any person under investigation is guilty of any offence punishable under sections referred to in sub-section (6), may arrest such person and shall, as soon as may be, inform him of the grounds for such arrest. Further, the provisions of Sub-section (9) and (10) of the section, provides light on the procedure of conducting such arrest by the Director and rules as mentioned below. These rules shall come into force from the date of their publication in Official Gazette i.e. 24th August, 2017.

PROCEDURAL REQUIREMENTS

  • The Director, Additional Director or Assistant Director, while exercising powers under sub-section (B) of section 212 of the Act, shall sign the arrest order together with personal search memo in the Form appended to these rules and shall serve it on the arrestee and obtain written acknowledgement of service.
  • The Director, Additional Director or Assistant Director shall forward a copy of the arrest order along with the material in his possession and all the other documents including personal search memo to the office of Director, SFIO in a sealed envelope with a forwarding letter after signing on each page of these documents, so as to reach the office of the Director, SFIO within twenty four hours through the quickest possible means.
  • An arrest register shall be maintained in the office of Director, SFIO and the Director or any officer nominated by Director shall ensure that entries with regard to particulars of the arrestee, date and time of arrest and other relevant information pertaining to the arrest are made in the arrest register in respect of all arrests made by the arresting officers. Entry shall be made immediately on receipt of documents.
  • The provisions of the code of criminal Procedure, 1973(2 of 1974), relating to arrest shall be applied mutatis mutandis to every arrest made under this Act
  • Arrest order together with supporting papers shall be preserved for a period of five years from:

(i) Date of judgement or final order of Trial court (in cases where judgement has not impugned in appellate court),OR

(ii) Date of disposal of the matter before appellate court (in case the judgement is impugned)

[WHICHEVER IS LATER]

CONCLUSION

Although it was difficult to prevent white-collar crime or corporate crimes, it wasn’t necessarily difficult to commit the same. This is the reason why the evolution of SFIO was important. SFIO has emerged with the main object of improving work practices among the corporates by imposing corporate criminal liability. If an individual who has committed a crime cannot be identified and there is no mechanism for corporate prosecution, the harmful practices would continue unbated. To avoid such a situation, SFIO acts as a corporate watchdog for critical research into corporate power and its doings. To conclude, we can say that corporate crimes are much in vogue today, and so are the methods to tackle them.


[1] http://www.mca.gov.in/Ministry/pdf/AmendmentAct_2015.pdf

[2] http://www.mca.gov.in/Ministry/pdf/companiesArrestsconnectionSFIORule_25082017.pdf

Section 185: As proposed under the Companies (Amendment) Bill, 2017

With the very introduction of Companies Act, 2013, section 185, being a prohibitory section, was of great importance. There was no scope of any carve out or any route to apply to Central Government’s approval for non-applicability of such restrictions, unlike section 295 of the Companies Act, 1956. Further, the said section was applicable to both pubic as well as private companies, which was totally unacceptable by private companies. Then MCA vide exemption notification dated June 5, 2015[1] exempted private companies form the provisions of section 185 which brought great relief to the private companies, however, such relief is even subject to stipulated conditions. Read more

Revised Secretarial Standards- Key Amendments

By Team Vinod Kothari & Company, (corplaw@vinodkothari.com)

Considering the various changes brought in the Companies Act, 2013, vide barrage of notifications, clarifications and amendments, there was a need to align the current Secretarial Standards viz. Secretarial Standard -1 (‘SS-1’) and Secretarial Standard -2 (‘SS-2’) with the changes in the provisions of the Act brought by virtue of such notifications, amendments etc.. Considering this, the Institute of Company Secretaries of India has revised the aforesaid Secretarial Standards issued in the year 2015. The revised standards will be effective from October 1, 2017.

Going through the revised text, it seems that the changes have been brought to align with the provisions of the Act keeping in mind the recent changes thereon, though, certain things are still said to be remained unattended. An analysis on the revised text is presented in the table below:

SS 1- Key Amendments

 

Para No Changes as per revised SS-1 Our Analysis
Scope has been amended to exempt Section 8 companies as well along with OPCs, from the applicability of the Standard. Section 8 Companies were already exempted from the applicability of Secretarial Standards vide MCA’s notification dated June 5, 2015, wherein the companies have been exempted from the applicability of Section of the Act, which deals with Secretarial Standards.
Definition of Secretarial Auditor now also includes a firm of Company Secretary(ies) in Practice. This has been inserted to provide clarity.
1.2 Earlier only Time, Place, Mode and Serial Number of Meeting was to be mentioned in the notice of the meeting now the Day has been specifically provided as per the Act This is a clarificatory change
1.2.2 The restriction of not holding a Board Meeting on a National Holiday specifically has gone away with. The same is in contradiction with the requirement of Act, which prohibits BM to be held on a National Holiday.
1.2.3 Any Director may participate through Electronic Mode in a Meeting unless the Act or any other law specifically prohibits such participation through Electronic Mode in respect of any item of business.

 

The provision with respect to the option of the company to provide video-conferencing facility has been done away with.

Now the Chairman has no authority to allow a Director to participate by electronic mode on restricted items. This has been done to align the same with the Act. Because, no such power was given to the Chairman in Act.

 

The existing language was conflicting with the provisions of the Companies Act, 2013 and hence, been deleted.

1.3 In case of the Meeting is conducted at a shorter Notice, the company may choose an expedient mode of sending Notice and Agenda. No mode of sending notice at a shorter notice was provided in the standards previously, with this amendment it is further clarified that any faster mode of sending the Notice.
1.3 The proof of sending of Notice has to be maintained for such period as decided by the Board, which shall not be less than 3 years from the date of Meeting. This will increase compliance burden for the companies.
1.3.4 The Notice shall inform the Directors about the option available to them to participate through Electronic Mode and provide them all the necessary information.

 

Further, the director may intimate his intention of participation through Electronic Mode at the beginning of the Calendar Year, which shall be valid for such Calendar Year.

This mandates every company to provide the option of participation through electronic mode, to the directors in every meeting.

 

This will be a one-time compliance annually in a calendar year.

1.3.6, 1.3.7 Sending notices, agenda, agenda notes and other documents by courier has been restricted. Only speed post and registered post are now accepted.
1.3.7 In case of alternate directorship, notice is given to both alternate and original director, however, the mode of sending Notice, Agenda and Notes on Agenda to the original director shall be decided by the company. It is clarified that the alternate director will receive notice and agenda as per the mode prescribed by the director, if any, however, the mode of sending the notice to the original director is on company’s discretion.
1.3.7 Proof of sending Agenda and Notes on Agenda and their delivery shall be maintained by the company for such period as decided by the Board, which shall not be less than three years from the date of the Meeting.

 

Companies will have to ensure such additional requirement.
1.3.10 Any item not included in the Agenda may be taken up for consideration with the permission of the Chairman and with the consent of a majority of the Directors present in the Meeting only, i.e., the requirement of consent of Independent Director has gone away with. This will provide ease in tabling urgent business matters at the meeting.
2.1 The company can hold at least four Meetings of its Board in each Calendar Year with a maximum interval of one hundred and twenty days between any two consecutive Meetings without holding meeting in every quarter. The strict requirement of holding board meeting in every quarter has gone away with.

 

However, for listed companies such relaxation may be redundant because of the periodical filing requirements with the stock exchange.

3.2 In case of a private company, a Director shall be entitled to participate in respect of such item after disclosure of his interest.

 

Further, If the item of business is a related party transaction, then he shall not be present at the Meeting, whether physically or through Electronic Mode, during discussions and voting on such item.

 

The amendment seems to create confusion as it has mixed intent of both Section 184 and Section 188 of the Act.

 

Going by the language of the revision, the related party will not be able to vote at the meeting on any transaction (the scope goes much beyond the transactions specified in Section 188). This will be very difficult for companies, especially private companies which are mostly closely held and even otherwise.

4.1. The mode of presence should be mentioned in attendance register also.

 

If an attendance register is maintained in loose-leaf form, it should be bound periodically, atleast once in every three years.

 

Further, where there is no CS, the attendance register must be authenticated by the Chairman or by any other Director authorised by the Chairman and the fact of such participation is must be recorded in the Minutes as well.

 

Even after a person ceases to be a Director, he shall be entitled to inspect the attendance register of the Meetings held during the period of his Directorship.

This will impose additional compliance burden on the companies which is not required as the minutes will already contain mode of presence and will also be preserved permanently.

 

Earlier the power of authentication was with the CS of the Company, however, such power has also been extended any other director who has been authorised in this regard.

 

 

This additional has provided an additional option for the directors to inspect the attendance register of the Meetings held during the period of his Directorship.

4.1.6 The attendance register shall be preserved for a period of at least eight financial years from the date of last entry made therein and may be destroyed thereafter with the approval of the Board. Clarity regarding the tenure has been provided.
4.2 Leave of absence shall be granted to a Director only when a request for such leave has been communicated to the Company Secretary or Chairman or to any other person authorised by the Board to issue Notice of the Meeting. Now, leave of absence can also be communicated to any person duly authorised by the Board to issue notice of the Meeting.
5.1.2 In case of a private company, the Chairman may continue to chair and participate in the Meeting after disclosure of his interest.

 

If the item of business is a related party transaction, the Chairman shall not be present at the Meeting, whether physically or through Electronic Mode, during discussions and voting on such item.

 

The insertion seems to bring further ambiguities as the first insertion provides that the Chairman may continue to chair and participate in the Meeting after disclosure of his interest.

 

However, in case of RPTs, the chairman shall not be present in the Meeting.

 

The intent of Section 184 and Section 188 has been mingled resulting into practical difficulties for companies.

5.1.2 The Chairman shall ensure that the required Quorum is present throughout the Meeting and at the end of discussion on each agenda item the Chairman shall announce the summary of the decision taken thereon.

 

This brings additional responsibilities on the Chairman.
6.1.1 Any Director other than an Interested Director, shall decide, before the draft Resolution is circulated to all the Directors, regarding the approval of the Board for a particular business shall be obtained by means of a Resolution by circulation.

 

The whole-time director has been changed to any director, providing ease in compliance to the companies.
6.2.2 Proof of sending and delivery of the draft of the Resolution and the necessary papers shall be maintained by the company for such period as decided by the Board, which shall not be less than three years from the date of the Meeting.

 

 

Earlier no time limit was specified this will impose additional compliance burden on companies.
6.2.3 An additional two days should be added for the service of the draft Resolution, in case the same has been sent by the company by speed post or by registered post or by courier, while computing the date of circulation of the draft of the Resolution given to the Directors to respond in case of Resolution by Circulation.

 

This additional two days have been given in order to provide sufficient time for the directors to decide, post receiving the draft.
6.3.2 The Resolution by circulation, if passed, shall be deemed to have been passed on the earlier of:

(a) the last date specified for signifying assent or dissent by the Directors, or

(b) the date on which assent has been received from the required majority, provided that on that date the number of Directors, who have not yet responded on the resolution under circulation, along with the Directors who have expressed their desire that the resolution under circulation be decided at a Meeting of the Board, shall not be one third or more of the total number of Directors; and shall be effective from that date, if no other effective date is specified in such Resolution.

This has been aligned with the Act.

 

However, SS also includes those directors who have not responded along with those who have expressed their desire that the resolution under circulation be decided at a Meeting of the Board. The same will cause practical difficulties to the companies.

7.2.1.3 The requirement of noting all appointments made one level below the Key Managerial Personnel by the Board has been done away with.

 

This will reduce minuting requirements.
7.2.2.1 (o) Consideration of any item other than those included in the Agenda with the consent of majority of the Directors present at the Meeting and ratification of the decision taken in respect of such item by a majority of Directors of the company.

 

Now the additional agendas taken at the meeting, the decision of which will have to be ratified even by the majority of the directors.
7.3.4 Reference to the earlier resolution to be mentioned in Minutes if a resolution is passed in supersession of it. This is a new insertion, which will provide complete facts and details.
7.4 Proof of sending draft Minutes and its delivery shall be maintained by the company for such period as decided by the Board, which shall not be less than three years from the date of the Meeting. Earlier no time period was provided for maintenance of these registers this will impose additional compliance burden on companies.
7.5.3 The alteration of Minutes entered shall be made only by way of express approval of the Board at its subsequent Meeting at which the Minutes are noted by the Board and the fact of such alteration shall be recorded in the Minutes of such subsequent Meeting. This has been added to in order to provide complete and correct data in the minutes. No such provision was there earlier.
7.6.4 Company needs to maintain the proof of sending the certified copy of signed minutes to the directors for 3 years. Like other documents, this has also to be maintained for three years.
9 The Report of the Board of Directors shall include a statement on compliances of applicable Secretarial Standards. This amendment will require the companies to specify in the Board’s Report, the fact that the Company is complying with the provisions of Secretarial Standards 1 and 2. No such specific disclosure was required earlier in Boards Report.

 

SS 2- Key Amendments

 

Para No. Changes as per revised SS-2 Our analysis
Scope has been amended to exempt Section 8 companies in addition to OPCs, from the applicability of the Standard. Ministry vide its notification dated June 5, 2015, has already exempted Section 8 companies from the applicability of Section 118 through which Secretarial Standards were prescribed. This aligns with such exemption.

 

Definition of Secretarial Auditor now also includes a firm of Company Secretary(ies) in Practice.

 

Though the intent was not to exclude a firm of PCS, however, the existing definition was not clear. This has been inserted to provide clarity.
1.2.2 The proof of sending the notice shall now be retained by or on behalf of the company for such period as decided by the Board, which shall not be less than three years from the date of the Meeting

 

No specific period has been mentioned in the existing text due to which an ambiguity was there as in what would be the time period for such retention of the proof of sending notice. Now, minimum 3 years period has been provided.
1.2.3 Notice shall simultaneously be hosted on the website till the conclusion of the meeting.

 

Listed companies were already required to place the notice on their website after dispatch of the same to the members by virtue of Rule 20 of MGT Rules. The said Rule as well as the existing para did not provide any timeline for keeping the notice on its website leaving it open ended. The amendment now clarifies that the notice shall be hosted on the website till the conclusion of the respective meeting.

 

1.2.4 Now, the notice of AGM should also specify the serial number of the Meeting. Companies generally specify the serial number of the meetings in the notice, however, this should now be specifically mentioned in order to comply with SS-2.

 

1.2.4 Exemption from providing the route map and prominent landmark has been provided in case of the following:

 

(a)   a company in which only its directors and their relatives are members;

(b)  a wholly owned subsidiary.

 

The existing requirement was not relevant for a company whose shares are held by directors only or a WOS of another company as the intent was to make it convenient for the members to attend the meetings.
1.2.4 In case of government companies, the AGM should be held at its registered office or any other place with the approval of the Central Government, as may be required in this behalf.

 

Similar requirement was brought by the Ministry vide its Notification dated June 5, 2015.

 

However, it is pertinent to note that the Ministry had come with another Notification on June 13, 2017 to amend the aforesaid June 5, 2015 Notification wherein it has been provided that Govt. companies may hold their AGM, at, (1) registered office, (2) such other place within the city, town or village in which the Registered Office is situated or (3) a place approved by the Central Government.

 

The revised text in SS seemingly missed the second category.

 

1.2.4 Notice of a private company shall specify the entitlement of a member to appoint proxy in accordance with this para, unless otherwise provided in the articles.

 

This is in line with the exception provided by the Ministry through June 05, 2015 Notification from Section 105 of the Act.
1.2.5 No resolutions are required to be stated in the notice for items of Ordinary Business. Existing text provided that where the auditors or directors to be appointed are other than the retiring auditors or directors, then the same shall be provided in the notice by way of a resolution even if the same falls under ordinary business.

 

The revised text has removed this requirement.

 

1.2.5 Explanatory statement to be annexed with the notice of private companies may not include the nature of the concern or interest (financial or otherwise of the directors, KMPs and their relatives along with other details as mentioned in the para if the Articles of such companies provide otherwise.

 

This is in line with the exception provided by the Ministry through June 05, 2015 Notification from Section 102 of the Act.
1.2.6 Private companies may not give notice and accompanying documents at twenty-one clear days in advance of the meeting if Articles provide otherwise.

 

This is in line with the exception provided by the Ministry through June 05, 2015 Notification from Section 101 of the Act.
1.2.7 The changes are as follows-

1.      Consent for holding a meeting at shorter notice shall have to be received by the company prior to the time fixed for the meeting;

 

2.      Companies are not required to observe the provisions relating to appointment of proxy if all the members entitled to vote give their consent to holding the meeting at shorter Notice; and

 

3.      Private companies may provide in its Articles, the manner of obtaining consent for a meeting at a shorter notice including the number of members from whom such consent will be required.

 

Considering the revised text, the following should be noted-

1.      The revised text has not considered the proposed amendment u/s 101 by virtue of the Companies (Amendment) Bill, 2017 wherein the manner of obtaining consent from the members is being proposed to be bifurcated considering the nature of the meeting viz. AGM or EGM;

 

2.      The change in the existing requirement of receiving the consent one day prior to the meeting to a time prior to the time fixed for the meeting is a welcome change considering the practical difficulties faced by the companies.

 

However, how will a company comply with the proxy requirements if the consent is received on the very day of the meeting is not clear as the consent may come at any time prior to the time fixed for the meeting and a proxy form has  to be submitted 48 hours prior to the date of meeting.

 

3.      The change related to private companies is in line with the exception provided by the Ministry through June 05, 2015 Notification from Section 101 of the Act.

 

5.1 Chairman of a meeting of private company may be appointed in terms of the provisions in its Articles.

 

This is in line with the exception provided by the Ministry through June 05, 2015 Notification from Section 104 of the Act.
6.1 The restriction on the proxies to be members of a Section 8 companies has been removed.

 

Further, private companies may appoint proxies in the manner as provide in their articles.

Though Section 105 did not provide for any restriction on a section 8 company, however, the existing text in this para had provided that the proxies have to be member also. This was a contradiction with the provisions of the Act which gets clarified by virtue of the deletion of the same.

 

The change related private companies is in line with the exception provided by the Ministry through June 05, 2015 Notification from Section 105 of the Act.

 

New Para New insertion.

 

Para 6.6.3.  In case of remote e-voting:

 

(i)                the letter of appointment of representative(s) of the President of India or the Governor of a State; or

 

(ii)              the authorisation in respect of representative(s) of the Corporations;

 

should be received by the scrutiniser/ company on or before close of e-voting.

 

In case of postal ballot such letter of appointment/ authorisation shall be submitted to the scrutiniser along with physical ballot form.

 

If the representative attends the Meeting in person to vote thereat, the letter of appointment / authorisation, as the case may be, shall be submitted before the commencement of Meeting.

 

 

Unlike proxies, there was no clarity in regard to the manner of submission of appointment/ authorisation letter of authorised representatives. In absence of a clear provision, the companies, scrutinisers appointed for meetings have faced practical difficulties and diverse practice is being followed.

 

The followings are to be noted-

 

1.      In case of remote e- voting such authorisation shall have to be received by the company/ scrutiniser on or before the closing of remote e-voting i.e. one day prior to the date fixed for physical meeting in terms of Rule 20 of MGT Rules. However, obtaining of such an authorisation in case of remote e- voting is meaningless as the identity of the person actually voting remains unknown.

 

2.      In case of presence of such authorised persons at the meeting for the purpose of voting, the authorisation letter shall be submitted before the commencement of the meeting;

 

3.      In case of postal ballot, the same shall be sent with the ballot form itself.

 

 

6.7.3 A proxy need not be informed of the revocation. This will reduce compliance on the part of member. However, without such intimation, how will the proxy come to know about the revocation remains unclear as the same may create confusion at the physical meeting.

 

7.1 Every resolution, except a resolution which has been put to vote through remote e-voting or on which a poll has been demanded, shall be proposed by a Member and seconded by another Member.

 

The requirement of proposing and seconding seemed vague in case of remote e-voting.  Same in case of a poll as a poll can be conducted only on demand or at the discretion of the Chairman. The Act does not provide any such requirement of a resolution to be proposed and seconded.

The removal is a welcome change.

 

7.3 In a meeting of a private company voting by show of hands shall be in accordance with the Articles.

 

This is in line with the exception provided by the Ministry through June 05, 2015 Notification under Section 107 of the Act.
7.4 In a meeting of a private company a poll shall be conducted in accordance with the Articles.

 

This is in line with the exception provided by the Ministry through June 05, 2015 Notification under Section 109 of the Act.
7.5.2 The changes are as follows-

 

In case of a private company, a member who is a related party is entitled to vote on such Resolution.

 

Further, a member who is a related party is entitled to vote on a Resolution pertaining to approval of any contract or arrangement to be entered into by:

 

a.       One Govt. company with any other Govt. company; or

b.      An unlisted Govt. company with the prior approval of competent authority.

 

 

This is in line with the exception provided by the Ministry through June 05, 2015 Notification under Section 188 of the Act for the private companies and Govt. companies.

 

However, listed companies will still have to observe the provisions of Listing Regulations.

 

 

 

8.4 The requirement of authorising the Chairman or in his absence, any other Director by the Board to receive the scrutiniser’s register, report on e-voting and other related papers with requisite details, has been deleted.

 

The deletion will not impact the current position as similar requirement is there under Rule 20 of MGT Rules.
8.5.2 Newspaper advertisement of notice of the meeting shall be placed till the conclusion of the meeting.

 

Please refer comments as provided under notice of meeting.
8.6.1 Scrutiniser to submit his report to the Chairman or authorized person within 3 days from the date of Meeting.

 

This is in line with the provisions under Rule 20 of the MGT Rules.

 

However, this will not impact the listed companies as the declaration of results is required within 48 hours of conclusion of the meeting in terms of Listing regulations.

 

8.6.2 The voting details is now required to be displayed for at least three days on the Notice Board of the company at its Registered Office and its Head Office as well as Corporate Office, if any, if such office is situated elsewhere.

 

Companies will have to ensure that the results are displayed for atleast three days. There was no timeline earlier.
9.2 Conduct of poll by private companies shall be in accordance with the Articles.

 

This is in line with the exception provided by the Ministry through June 05, 2015 Notification under Section 109 of the Act.
9.5.1 The scrutiniser(s) shall submit his report within seven days from the last date of the poll to the Chairman.

 

In case of a private company, the declaration of result of poll shall be in accordance with this para, unless otherwise provided in the Articles.

Rule 21 of MGT Rules does not provide for any such timeline for submission of report by the scrutiniser in case of voting in a poll. The revised text provides for 7 days timeline to the scrutiniser to submit his report and 2 days of submission of such report for declaration of such result by the Chairman.

 

Considering the fact that the provisions of Section 109 (Demand for Poll) are not applicable to a company covered under Section 108 (Mandatory voting through electronic means), this will impact only those companies which are not covered under Section 108.

 

In regard to private companies, the change is in line with the exception provided by the Ministry through June 05, 2015 Notification under Section 109 of the Act.

 

13.2 The qualifications, observations or comments or other remarks if any, mentioned in the Secretarial Audit Report issued by the Company Secretary in Practice, which have any material adverse effect on the functioning of the company, should be read at the AGM.

 

Now, only the qualifications, observations or comments which have any material adverse effect on the functioning of the company are required to be read out at the AGM. However, what would be the manner of determination of such material impact have not been provided.
15.3 If a meeting is adjourned for a period not exceeding three days and where an announcement of adjournment has been made at the meeting itself, giving in the details of day, date, time, venue and business to be transacted at the adjourned meeting, the company may also opt to give notice of such adjourned Meeting either individually or by publishing an advertisement.

 

Generally, a 3 days’ notice is required for a meeting adjourned for less than 30 days. However, if such an adjournment meeting is held within 3 days and the venue, date, time etc. has already been decided in the original meeting, the company has been given an option to further send a notice.

The insertion is not relevant.

15.4

 

A meeting other than an AGM or a requisitioned meeting stands adjourned for want of quorum, then the adjourned meeting shall be held on the same day, in the next week at the same time and place or on such other day, irrespective of the fact that the day be a National Holiday.

 

An adjourned AGM, adjourned for want of quorum or otherwise, shall not be held on a National Holiday, only if any item relating to filling up of vacancy of a director retiring by rotation is included in the agenda of such adjourned Meeting.

 

The company shall ensure compliance of the provisions of holding the AGM every year, including adjournment thereof within a gap of not exceeding 15 months from the date of the previous AGM or within such extended period permitted by the Registrar of Companies.

 

1.      Now companies will be able to adjourn an EGM even on a national holiday. The Act is silent on this.

 

2.      Further, restriction on holding of an adjourned AGM on a national holiday shall be applicable only on a situation where an item relating to filling up of vacancy of a director retiring by rotation is pending to be decided in such adjourned meeting. Therefore, for discussions of items other than the above, an AGM may be adjourned to be held on a national holiday too.

 

3.      In regard to changes for private companies the same is in line with the exception provided by the Ministry through June 05, 2015 Notification under Section 96 and 100 of the Act.

 

 

16.6.1 The scrutiniser shall submit his report within seven days from the last date of receipt of postal ballot forms to the Chairman or a person authorised by him, who shall countersign the same.

 

The same has been aligned with Rule 22 of MGT Rules. However, the listed companies will still have to observe the requirements of the Listing Regulations.
16.6.2 Scrutiniser’s report shall be displayed for at least three days.

 

A period of three days has to be maintained like in case of displaying the results of AGM.
17.1.6 Minutes of Meetings, if maintained in loose-leaf form, shall be bound periodically at least once in every three years.

 

Now the maximum periodicity has been provided.
17.2.1.1 The conclusion time of the AGM is not required to be mentioned in the minutes. Not a relevant change.
Provisions for Nidhi Companies
1.2.1 In case of a Nidhi Companies, notice may be served individually only on Members who hold shares of more than 1000 rupees in face value or more than 1% of the total paid-up share capital of the company, whichever is less. For other Members, Notice may be served by a public notice in newspaper circulated in the district where the Registered Office of the company is situated and by displaying the same on the Notice Board of the company No such option was available to the Nidhi Companies as per the erstwhile SS. However, the same has been aligned with the MCA’s exemption provided to Nidhi Companies vide its notification dated June 5, 2015.
7.5.1 No Member shall exercise Voting Rights on poll in excess of five percent of total Voting Rights of equity shareholders.
16.2 Nidhis are not required to provide e-voting facility to their Members.

 

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