Alignment of Audit & Auditors Rules with Amendment Act, 2017

Relatives’ interest affecting the independence criteria of IDs

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

Introduction

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

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

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

Introduction

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

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

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

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

1.        MBP Amendment Rules, 2018[3]

 

Sr. No.

Matter Description

Prior to Amendment

 

Nature of Amendment

 

Impact of the Amendment

 

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2013 does not allow the participation of directors in board meetings for discussing certain matters in the nature of unpublished price sensitive information (‘UPSI’).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

 

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

 

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

 

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

 

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

 

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

 

 

 

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

 

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

 

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

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

 

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

 

No impact, only the language has been altered.

2.        SCD Amendment Rules, 2018[4]

 

S.no Matter description

 

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

 

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

 

 

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

 

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

 

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

 

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

 

Conclusion

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


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

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

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

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

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.


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

To read our other resources – Click here


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