Implementation issues of MCA’s mandate for compulsory DEMAT in case of WOS

– Shares required to be credited in personal demat accounts of nominee holders

CS Vinita Nair (corplaw@vinodkothari.com)

This is in continuation to previous write up ‘Physical to Demat: A move from opacity to transparency’. With just 10 days left for the timeline set by Ministry of Corporate Affairs (MCA) to expire, Companies initiate steps for facilitating transfer of securities in demat. The first step being obtaining of ISIN for each of the securities issued and thereafter, intimating the shareholders about the same in order to facilitate transfer on and after October 2, 2018.

This article discusses the implementation difficulty that is being faced by holding companies complying with the aforesaid requirement for its wholly owned subsidiaries.

Relevance in case of WOS

Shareholding pattern

Typical shareholding structure in case of WOS is a under:

  1. Nominee shareholder holding jointly with the holding company

a. Nominee shareholder submits declaration in Form MGT-4 declaring that it holds shares on behalf of the beneficial owner being the holding company;

b. The company , being the beneficial owner as well as registered owner (joint holder) is not required to submit Form MGT-5 as the name reflects in the register of members

  1. Nominee shareholder holding singly on behalf of the holding company

a. Nominee shareholder submits declaration in Form MGT-4 declaring that it holds shares on behalf of the beneficial owner being the holding company.

b. The holding company submits declaration in Form MGT-5 declaring that it beneficially holds the shares registered in the name of the nominee shareholder.

c. The WOS files eForm MGT-6 with the Registrar on receipt of aforesaid declaration.

In case of private companies, there is atleast 1 nominee shareholder and in case of public companies, there are 6 nominee shareholders for the purpose of complying with the requirement of minimum number of shareholders.

The nominee shareholders holding the shares on behalf of the holding company are employees of the holding company or of the WOS. Most commonly, these shares are held in physical form and the share certificates of the nominee shareholders are also with the holding company for safekeeping. In the event where the nominee shareholder ceases to be the employee, the shares are transferred in the name of new employee, and aforesaid forms are re-submitted.

Mandatory demat neither adds value nor provides further transparency in case of WOS.

Practical issues

Following practical issues are likely to be faced:

In case of nominee shareholder holding jointly with holding company:

  • The Company as well as the nominee shareholder must be having their respective demat accounts. However, for the purpose of joint holding in demat, both the company and the nominee shareholder will have to jointly open a demat account. Where the employee ceases to be nominee, the account may have to be closed or modified to have the new nominee shareholder as first holder.

In case of nominee shareholder holding singly, on behalf of holding company:

  • The shares will have to be credited in the personal demat account of the nominee shareholder. In that case, the holding company will not have any control on the shares. Where the employee resigns and the holding company intends to have new nominee shareholder, the transfer can be effected in the demat account of the new shareholder only where the Delivery Instruction Slip (DIS) is signed by the transferor nominee. Therefore, it is prudent to have the DIS signed beforehand to avoid any difficulty while effecting the transfer later.
  • Additionally, the depositories should also have a mechanism to mark/ lock such securities in the manner done in case of pledge, in order to disable the nominee from transferring shares without the consent of the holding company.

Conclusion

There is an urgent need for MCA to exempt several provisions, including the current one, in case of WOS, as these are perfunctory compliance given the shareholding pattern of the WOS. A WOS is similar to a One Person Company with the only difference that the member is a Company instead of a natural person. Accordingly, the requirement to hold AGM, passing of special resolutions, holding shares in demat adds no further transparency. The holding is entirely reported in the balance sheet of the holding company. Corporates may appropriately represent the same before MCA to implement appropriately.

Managerial Remuneration: A five decades old control cedes

Revised, stringent private placement framework becomes effective: a step-by-step guide to compliance

CS Vinita Nair, Partner, Vinod Kothari & Company

corplaw@vinodkothari.com

 

Substitution of Section 42 was one of the major amendments proposed under Companies (Amendment) Act, 2017. MCA on August 7, 2018 enforced Section 10 of Companies (Amendment) Act, 2017 amending Section 42 of Companies Act, 2013 (‘Act, 2013’) with effect from 7th August, 2018.

MCA amended Companies (Prospectus and Allotment of Securities) Rules, 2014 (‘PAS Rules’) to substitute Rule 14 dealing with private placement with effect from 7th August, 2018. Comparison/ mapping of Rule 14 of PAS Rules can be read here.

This article provides the revised procedure for private placement under Act, 2013 in the light of aforesaid amendments:

Phase 1: Prior to issuance of Private Placement Offer cum Application Letter (PPOAL)

  1. Passing of Board resolution under Section 179 (3) (c) for issue of securities;
  2. Delegating the power in relation to identifying persons, making of offer addressed to such identified persons, distributing of offer letter, allotment of securities to a Committee of Board or Committee of Management or officers of the Company;
  3. Filing of resolution passed under 1 and 2 with the Registrar pursuant to Section 117 (3) (g) of Act, 2013 in e-Form MGT 14;
    • Private companies are exempted from the requirement to file eform MGT-14 under Section 117 (3) (g) for resolutions passed under Section 179 vide  Notification dated 5th June, 2015. However, such private companies will also be required to file MGT-14 for board resolution passed for issue of securities under private placement.
  4. Seeking approval of shareholders by way of special resolution for issue of securities by way of private placement;
    • Separate approval of shareholders shall not be required in case of issuance of non-convertible debentures if the proposed amount to be raised is within the borrowing limits approved by the shareholders under Section 180 (1) (c) of the Act, 2013.
    • Explanatory statement to specify the matters provided in proviso to Rule 14 (1) reproduced hereunder:
      • Particulars of the offer including date of passing of Board resolution;
      • Kinds of securities offered and the price at which security is being offered;
      • Basis or justification for the price (including premium, if any) at which the offer or invitation is being made;
      • Name and address of valuer who performed valuation;
      • Amount which the company intends to raise by way of such securities;
      • Material terms of raising such securities, proposed time schedule, purposes or objects, contribution being made by the promoters or directors either as part of the offer or separately in furtherance of objects, principle terms of assets charged as securities.
  1. Filing of resolution passed under 4 above with the Registrar pursuant to Section 117 (3) (a) of Act, 2013 in e-Form MGT 14;
  2. Identification of persons to whom offer is required to be made by the Board or Committee/ officers delegated with the power by the Board;
  3. Ensuring the number of persons to whom the offer to be made does not exceed 200 (reckoned individually for each kind of security that is equity share, preference share or debenture) in a financial year.
    • Limit is not applicable in case of NBFCs, HFCs if they are complying with regulations made by the Reserve Bank of India or the National Housing Bank in respect of offer or invitation to be issued on private placement basis.
  4. Recording the names and addresses of the person in the record of private placement maintained in Form PAS-5;
  5. Opening of separate bank account for receipt of application money;

Phase 2: Issuance of PPOAL

  1. Sending of PPOAL in Form PAS 4 to the identified persons within 30 days of recording the name of such person. PPOAL shall not carry right of renunciation;
    • No fresh offer or invitation under this section shall be made unless the allotments with respect to any offer or invitation made earlier have been completed or that offer or invitation has been withdrawn or abandoned by the company.

Phase 3: Post issuance of PPOAL

  1. Every identified person willing to subscribe to the private placement issue shall apply in the private placement and application issued to such person along with subscription money paid either by cheque or demand draft or other banking channel and not by cash;
  2. Payment shall be made for subscription to securities from the bank account of the person subscribing to such securities in the separate bank account of the Company;
    • This shall not apply in case of issue of shares for consideration other than cash.
  3. Company shall keep record of the bank account from where such payment is received;

Phase 4: Allotment of securities

  1. Allotment shall be made by the Board or Committee/ officers delegated with the power;
  2. Return of allotment shall be filed in e-Form PAS -3 with the Registrar within 15 days of allotment;
  3. Company shall utilize the amount only after filing the return of allotment;
  4. Company shall issue share certificates/ debenture certificates within a period of two months from the date of allotment;
  5. Entry shall be made in the register of members/ debenture holders within 7 days of after the Board of Directors or its duly constituted committee approves the allotment of securities.