Revised Section 42: What’s in the name!

By CS Vinita Nair (corplaw@vinodkothari.com)

Section 42 has been substituted by way of section 10 of Companies (Amendment) Act, 2017[1]. Draft rules amending Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014 have been issued for public comments[2].

Erstwhile section 42 dealt with ‘Offer or invitation for subscription of securities on private placement’. Substituted section 42 has been titled as ‘Issue of shares on private placement basis’. This leads to a general perception that revised section 42 shall not apply to issue of non-convertible debentures on a private placement basis. It will only apply in case of issue on preferential basis considering corresponding amendment in section 62 (1) (c)[3].

Relevance of marginal note

It is a well settled view that marginal note cannot control/ limit the provisions of the section. In case of Chandroji Rao vs Commissioner of Income-Tax, M.P[4] Hon’ble Supreme Court explained that the marginal heading cannot control the interpretation of the words of the section particularly when the language of the section is clear and unambiguous. There are several other rulings of Hon’ble Supreme Court reiterating the aforesaid interpretation.

Modes of issuance of securities under Companies Act

Chapter III of Act, 2013 deals with prospectus and allotment of securities. Part I deals with public offer and Part II deals with private placement. Section 23 (1) provides the manner in which a public company may issue securities viz.;

  1. by way of public issue by complying with provisions of Part I; or
  2. through private placement by complying with provisions of Part II; or
  3. through rights issue or a bonus issue in accordance with section 62 (1) (a) and section 63 respectively.

Section 23 (2) provides the manner in which private company may issue securities viz.;

  1. by way of rights issue or a bonus issue in accordance with section 62 (1) (a) and section 63 respectively;
  2. through private placement by complying with provisions of Part II.

Private placement under Act, 2013

‘Private Placement’ has been explained in section 42 to mean any offer or invitation to subscribe or issue of securities to a select group of persons by a company (other than by way of public offer) through private placement offer-cum-application, which satisfies the conditions specified in the section.

While the marginal note refers to issue of shares, the meaning of private placement clearly refers to ‘securities’. Given the intent under section 23 (1) and (2), it is clear and unambiguous that any private placement of securities will be subject to compliance of provisions of section 42. It cannot be interpreted that ‘securities’ referred in Section 42 refers to the expression, “shares or other securities” explained in Rule 13 of Companies (Share Capital and Debentures) Rules, 2014.

Discussion in CLC Report[5] on issue of debentures by private placement

“3.8 At the moment, in case of non-convertible debentures a prior special resolution only once in a year has been prescribed. The Committee recommends that since Non-Convertible Debentures are pure borrowings and do not form part of equity capital, the proviso to Rule 14(2)(a) may be amended to prescribe that the relevant board resolution under Section 179(3)(c) would be adequate in case the offer under Section 42 is for debentures up to the borrowing limits permissible for Board under section 180(1)(c) of the Act. This would also align the requirements with that of section 180(1)(c). It was, however, felt that the said Board resolution should clearly mention (in the body of the resolution) that the offer of debentures being approved by Board is through private placement under Section 42 and certain other minimum details as may be prescribed in the rules be provided in the Board resolution. Private companies (who have been given exemption from Section 117(3)(g) through section 462 notification) should either be required to file board resolutions under Section 179(3)(c) or pass a special resolution.”

As stated above, the intent was only to exempt the requirement of seeking shareholder’s sanction if the company had already obtained approval of shareholders u/s 180 (1) (c). Apart from this, compliance of entire section is required to be ensured.

Conclusion

Companies should be careful and not interpret that section 42 shall not apply to private placement of debentures. Otherwise, the company, its promoters and directors shall expose themselves to huge amount of penalty.


[1] Yet to be enforced.

[2] http://www.mca.gov.in/Ministry/pdf/DraftCompaniesProspectusSecuritiesRules2018_15022018.pdf

[3] (c) to any persons, if it is authorised by a special resolution, whether or not those persons include the persons referred to in clause (a) or clause (b), either for cash or for a consideration other than cash, if the price of such shares is determined by the valuation report of a registered valuer subject to such conditions as may be prescribedof a registered valuer, subject to the compliance with the applicable provisions of Chapter III and any other conditions as may be prescribed.

[4] 1971 SCR (1) 422

[5] Company Law Committee Report – February, 2016

Crucial Step taken by MCA to remove the curtain on SBOs

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

 

Introduction

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

Changes under section 89 and Draft SBO Rules

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

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

Changes under section 90 and Draft SBO Rules

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

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

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

Conclusion

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


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

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

CS Vinita Nair, Partner, Vinod Kothari & Company

corplaw@vinodkothari.com

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

MCA gears up for curtain raiser of SBO

Issues draft rules on Section 89 and 90

CS Vinita Nair, corplaw@vinodkothari.com

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

Extract or the Annual Return itself- Anomaly under section 92 through the Companies (Amendment) Act, 2017

By Pammy Jaiswal & Munmi Phukon(corplaw@vinodkothari.com)

Introduction

While the Companies (Amendment) Act, 2017 (‘Amendment Act’) has brought sea changes in various provisions of the Companies Act, 2013 (‘Act’), in absence of a clarification, some of the provisions are still left open for interpretation. One of them is with respect to placing of annual return on the website of the company and this write –up revolves around the impact of the same in the pattern of FAQs.

Contents of annual return

Annual return is a detailed document in electronic form which contains the relevant data of the company in respect of one financial year and the same is prepared for the purpose of filing with the Registrar in terms of Section 92 of the Act. Some of the particulars of the return includes-

  • Basic details like CIN, registered office address, email-id, principal business activities, share capital and indebtness;
  • Names of the holding, subsidiary and associate companies;
  • Date of Annual General Meeting (‘AGM’);
  • Turnover and net worth;
  • Details of KMP and directors and remuneration drawn by them,
  • Meeting details;
  • Penalty, punishments, etc.

FAQ section

  1. What are the changes made under Section 92 through the Amendment Act, 2017?

Ans: Following changes have been brought under section 92 of the Act are as follows:

  • No details related to indebtness of the company are required to be given.
  • Additional details of Foreign Institutional Investors will not be required to be given.
  • Abridged form of annual return shall be prescribed for small companies, one person company and certain classes of companies which shall be prescribed by way of rules.
  • Web-link of the annual return shall be given in the Board’s report instead of the extract of the annual return in form MGT-9.
  • Additional time allowed under Section 403 for belated filing within additional 270 days has been done away with.
  1. What will be the impact of the removal of information related to indebtness?

Ans: Since the details pertaining to indebtness are already contained in the balance sheet of the company, the removal of the same will not have an impact on the disclosures made by the company.

  1. How will the companies comply with the requirement of providing web link of annual return as the same is filed with Registrar post AGM only? Does that mean that now companies will have to prepare their annual returns in advance?

Ans: Before the Amendment Act, companies were required to prepare and file their annual return within 60 days of holding of the AGM, while the extract of the same in MGT-9 was being annexed in the Board’s Report and sent to the members along with the AGM notice well in advance. Considering the requirement of web link of annual return in the Board’s Report, it may be interpreted in two ways:

  • Prepare annual return prior to the AGM

Looking at the language of the amended text of law, the web-link of the annual return has to be given in the Board’s Report. Though CLC Committee used the phrase ‘annual return filed by the company’, however, the text in the Amendment Act simply states ‘annual return of the company’. Practically, the Board’s Report is being sent along with the AGM notice after approval of the same by the Board.  Further,  companies used to have a time limit of upto 60 days to prepare and file their annual return from the date of the AGM. Supposing the approval of the Board is taken 30 days prior to the AGM, the companies may henceforth be required to prepare and place the annual return on the website almost 30 days in advance of the AGM i.e. the date of approval by the Board. Accordingly, if one has to interpret the amendment in this manner, the whole exercise of preparation of annual return will have to be finished almost three months in advance as compared to the existing practice.

  • Keep ready the website page for reflecting the filed annual return

The other interpretation of the amendment may be taken to mean that while the companies create a web-page for reflecting the annual return on their website and give the link of the same in their Board’s Report, such Report shall contain a statement that the annual return shall be uploaded by the company of the date of filing of the same with the Registrar and thereafter the same can be viewed by the members and stakeholders. This interpretation, in our view, is more logical because date of AGM is a mandatory field in the annual return and the same can be conclusively filled once the meeting is duly called, held and conducted on a particular date. Companies cannot fill the date prior to the holding of the meeting. Having said so, we have to wait for the rules to come up with to provide clarity.

  1. What will be the situation for companies which do not have to maintain their official website?

Ans: Private companies and other unlisted public companies which are not required to maintain any functional website will anyways not be affected by the said amendment and they can simply continue to prepare their annual return within the same time as their existing practice.

  1. For how many years should the annual return be hosted on the website?

Ans: The amendment is silent on the same. However, companies may at their discretion keep the annual return of a particular year hosted for three years or so. It can also think of creating a tab of annual return similar to that of annual report where visitors can view the annual returns for different financial years.

This obviously is the decision of the company and the practice it follows for separate set of such documents.

  1. Whether MGT 9 will still be required?

Ans: We will have to wait till amendment in the rules come. Seemingly, if the copy of the annual return itself will be required for placing on the website, MGT-9 will get removed.

  1. Whether the abridged form of annual return has been prescribed by the Ministry?

Ans: The abridged form of annual return has not been prescribed till date. We will have to wait for the rules to come out with the same.

  1. What will be the impact of doing away with the additional details of FIIs?

Ans: Details like addresses, countries of incorporation, registration, etc. will no more be required to be given in the annual return. The same shall help in reducing the file size of the e-form since in many cases, companies were required to attach the details of their FIIs as an optional attachment.

Conclusion

While the Ministry made an attempt to reduce the burden of documentation in the board’s report, it left these questions boggling in the minds of the readers. Even though we have tried to critically examine the essence of the change, one will still have to wait for the rules to come in this regard since the amendment itself is not giving a clear picture.

 


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