Integrated Reporting

Investor awareness by BSE & NSE- forceful dematerialization

By Munmi Phukon, Smriti Wadehra and Shreya Jain 

corplaw@vinodkothari.com

Currently, the provisions of Regulation 40 of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, facilitate transfer of securities both in physical and dematerialized form. However, SEBI vide its notification dated 8th June, 2018 had notified the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Fourth Amendment) Regulations, 2018[1] by virtue of which it has mandated the processing of transfer of securities only when such securities are held in dematerialised form. The aforesaid amendment shall come into force on the 180th day from the publication of the Amendment Regulations i.e. 5th December, 2018.

Considering the need of the hour, BSE and NSE on 5th July, 2018[2] and 9th July, 2018[3], respectively, has issued two Circulars requiring companies and their RTAs to set up a mechanism for dissemination of information and spreading awareness among various investors about mandatory dematerialization of securities. Though some of the companies have already placed this information in the AGM notices, based on the aforesaid Circulars, the companies are also required to put in place a mechanism including the following in order to spread awareness about the proposed change:

  • The companies through their RTA should send a letter through post to the holders of physical shares and reminding them about the said amendment and also about the impact of the said regulation on transfer of the said physical format shares w.e.f. December 5th, 2018.
  • Atleast two reminders by RTAs is advised to be sent to in a gap of 30 days to the all those shareholders who are holding their shares in physical format, to get it dematerialized.
  • Companies to disseminate such information on their website intimating the investors about the proposed change and provide appropriate guidance on how to dematerialize their shares.
  • Companies should ensure that the signature cards of all the holders of physical securities are handed over to its RTA at the earliest.

It is understood that the intent of the aforesaid Circulars is to provide for the actionable on the part of the companies so as to inform their respective shareholders to convert their physical shares into demat form at the earliest so that the liquidity of the securities does not get affected. Further, though the NSE Circular is silent but BSE may require a reporting to be made by the companies to the effect of compliance of the aforesaid requirements in a specified format to be prescribed by it by end of September 2018.

To conclude we may say that through such automation the burden of compliance shall be reduced on the part of the Company and in this regard SEBI is enhancing the role of depositories in various activities of the Company. Therefore, the companies should take adequate steps to ensure dematerializing the physical shares before the commencement of this Regulation so as to avoid any last minute hassle.


[1] https://www.sebi.gov.in/web/?file=https://www.sebi.gov.in/sebi_data/attachdocs/jun-2018/1528952919510.pdf#page=1&zoom=auto,-23,792

[2] https://www.bseindia.com/corporates/Displaydata.aspx?Id=cd22b184-1153-4b05-8ad9-d04699161f89&Page=cir

[3] https://www.nseindia.com/corporates/content/eq_listcompanies.htm

Enhanced ODI Limits for AIFs and VCFs

By Simran Jalan (corplaw@vinodkothari.com)

Background

The Securities and Exchange Board of India (SEBI) came out with a circular on July 3, 2018[1] (Circular) to liberalise the regulatory regime surrounding overseas investments by Alternative Investments Funds (AIF) and Venture Capitals Funds (VCF). However, before we delve further into the contents of the notification, let us have a quick discussion on what AIFs and VCFs are.

AIFs are privately pooled investment vehicles established in India and registered with the SEBI and is not a mutual fund or collective investment scheme. AIFs can be of following three categories –

  1. Category I – These funds invest only in early stage start-ups.
  2. Category II – Category II AIFs shall include AIFs which do not fall in Category I and III and which do not undertake leverage or borrowing other than to meet day-to-day operational requirements
  3. Category III – These include AIFs which employ diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives.

Read more

SEBI proposes to streamline the ICDR Regulations

By Pammy Jaiswal, (pammy@vinodkothari.com) & Nikita Snehil (nikita@vinodkothari.com)

The SEBI had constituted the Issue of Capital & Disclosure Requirements Committee (‘ICDR Committee) under the Chairmanship of Mr. Prithvi Haldea in June, 2017, to review the ICDR Regulations. The ICDR Committee suggested certain policy changes which were taken to the Primary Market Advisory Committee (‘PMAC’) of SEBI which comprises of eminent representatives from the Ministry of Finance, Industry, Market Participants, academicians, the Institute of Chartered Accountants of India and the Institute of Company Secretaries of India. Thereafter, pursuant to the recommendations made by the PMAC, SEBI vide its Press Release dated May 4, 2018[1], has come out with its Consultation Paper on Review of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, on its website for public comments.

Approach adopted by the ICDR Committee

The Consultation Paper provides that the ICDR Committee while reviewing the Regulations and Schedules, adopted the following approach:

  1. Simplify language and structure of the regulations to enhance its readability;
  2. Separate the chapters on the basis of the type of offering so that all relevant information pertaining to the regulations relating to a particular type of offering are available at one place;
  3. Align the regulations in line with the various informal guidance/ interpretative letters/ frequently   asked   questions   regarding   interpretation   of   various provisions of the regulations, issued by SEBI from time to time;
  4. Update the regulations with the changes that have taken place in the last few years, including in the Companies Act, 2013, adoption of Indian Accounting Standards, various ICDR related circulars, SEBI (Share Based Employee Benefit) Regulations, 2014, SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011, ASBA, abolition of MRTP, etc.;
  5. To identify policy changes in line with the present market practices and the prevailing regulatory environment.

In this regard, the present article, through the following table, portrays the major changes proposed by SEBI for issuance through rights issue, bonus, preferential allotment and QIPs, the rationale behind such changes and the impact of such proposed changes.


Chapter Existing Provision Proposed changes Rationale Remarks
Rights Issue
Rights Issue – Roll over of non-convertible portion of partly convertible of debt instruments

 

21. (1) The non-convertible portion of partly convertible debt instruments issued by a listed issuer, the value of which exceeds fifty lakh rupees, may be rolled over, without change in the interest rate subject to compliance with the provisions of section 121 of the Companies Act, 1956 and the following conditions: 64. {21. (1)} The non-convertible portion of partly convertible debt instruments issued by a listed issuer, the value of which exceeds ten crore rupees, may be rolled over, subject to compliance with the provisions of the Companies Act, 2013 and the following conditions: It is proposed to increase the low threshold of Rs. 50 Lacs to Rs. 10 Crore. Proposed change will make debt securities with non-convertible portion lesser than Rs. 10 crores to become ineligible for roll-over.

Further, the reference to section 121 of the Companies Act, 1956 has been removed considering that the same is not present under the Act, 2013 and accordingly, the reference to the Act, 2013 has been made.

Rights Issue – Issue of warrants 4. (3) An issuer shall be eligible to issue warrants subject to the following: … (b) not more than one warrant shall be attached to one specified security (c) the price or conversion formula of the warrants shall be determined upfront and at least 25 of the consideration amount shall also be received upfront 67. {4. (3)} An issuer shall be eligible to issue warrants subject to the following: a) the tenure of such warrants shall not exceed eighteen months from their date of allotment in the rights issue; b) A specified security may have one or more warrants attached to it; c) the price or formula for determination of exercise price of the warrants shall be determined upfront and disclosed in the letter of offer and at least twenty-five per cent. of the consideration amount based on the exercise price shall also be received upfront; Provided that in case the exercise price of warrants is based on a formula, twenty-five per cent. consideration amount calculated as per the formula with reference date being the record date shall also be received upfront. d) in case the warrant holder does not exercise the option to take equity shares against any of the warrants held by the warrant holder, the consideration paid in respect of such warrant shall be forfeited by the issuer. It is proposed to introduce flexibility of having more than one warrant attached to a specified security and to clarify that the price or formula for determination of exercise price of the warrants shall be determined upfront and that if the warrant is not exercised, 25% of consideration will be forfeited The proposed change will allow more than one warrant to be attached to a specified security and the same shall enable more flexibility to the warrant holder in terms of conversion decision.

Further, 25% of the consideration based on warrant exercise price as paid shall be forfeited in case of non-exercise of option.

Rights Issue – Record Date 52. (1) A listed issuer making a rights issue shall announce a record date for the purpose of determining the shareholders eligible to apply for specified securities in the proposed rights issue. 68.(1) {52. (1)} The issuer shall announce a record date for the purpose of determining the shareholders eligible to apply for specified securities in the proposed rights issue at least seven working days prior to the record date or such period as may be specified in the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. It is proposed to make the provision of record date consistent with the SEBI LODR Regulations. Proposed change is made to align ICDR with Listing Regulations.
Rights Issue – Filing of the draft letter of offer and letter of offer 6. (1) No issuer shall make, (a) a public issue; or (b) a rights issue, where the aggregate value of the specified securities offered is fifty lakh rupees or more, unless a draft offer document, , along with fees as specified in Schedule IV, has been filed with the Board through the lead merchant banker, at least thirty days prior to registering the prospectus, red herring prospectus or shelf prospectus with the Registrar of Companies or filing the letter of offer with the designated stock exchange, as the case may be 71. (1) {6. (1)} Prior to making a rights issue, the issuer shall, except in case of a fast track issue, file a draft letter of offer, with the concerned regional office of the Board under the jurisdiction of which the registered office of the issuer company is located, in accordance with Schedule IV, along with fees as specified in Schedule III, with the Board and with the stock exchange(s), through the lead manager(s). It is proposed to clarify that filing of letter of offer with the Board is not required in case of a fast track issue, although the fee will be paid. The proposed change shall do away with filing of the offer letter with the exchange which seems to a welcome change considering the timeline under fast track issue.
Rights Issue – ASBA

 

58. (5)} The issuer shall provide the ASBA facility in the manner specified by the Board where not more than one payment option is provided. Provided that in case of qualified institutional buyers and non-institutional investors the issuer shall accept submit their bids applications using the ASBA facility only. Retail individual investors may either apply through ASBA facility or make payment through cheque or demand draft. 76. {58. (5)} The issuer shall provide the ASBA facility in the manner specified by the Board where not more than one payment option is provided. Provided that the applicants in a rights issue shall be eligible to make applications through ASBA facility only if such applicant: (i) is holding equity shares in dematerialised mode; (ii) has not renounced entitlement in part or in full; and (iii) is not a renouncee It is proposed to clarify that applicants in a Rights Issue shall make applications only through ASBA facility and will have the provision to make a physical application in in certain specified scenarios. Proposed change will not allow applicants in a rights issue to participate in the following cases:

·     Applicant is holding equity shares in physical mode;

·     Applicant has renounced entitlement in part or in full; and

·     Applicant is not a renouncee.

Rights Issue – Underwriting 13. (1) Where the issuer making a public issue (other than through the book building process) or rights issue, desires to have the issue underwritten, it shall appoint the underwriters in accordance with Securities and Exchange Board of India (Underwriters) Regulations, 1993. 81. (1) {13. (1)} If the issuer desires to have the issue underwritten, it shall appoint the underwriters in accordance with the Securities and Exchange Board of India (Underwriters) Regulations, 1993.

Provided that the issue can be underwritten only to the extent of entitlement of shareholders other than the promoters and promoter group.

It is proposed to clarify that issue can be underwritten only to the extent of entitlement of public shareholders (and not for the entitlement of the promoters and promoter group). Proposed change prohibits underwriting the offer made to the promoters in a rights issue. The same is logical considering that if promoters portion is also required to be underwritten , then one obviously cannot be sure of the subscription to the non-promoters’ portion.
Rights issue – Fast Track Rights Issue – Eligibility Conditions 10. (1)(c the annualised trading turnover of the equity shares of the issuer during six calendar months immediately preceding the month of the reference date has been at least two per cent. of the weighted average number of equity shares listed during such six months‘ period Provided that for issuers, whose public shareholding is less than fifteen per cent. of its issued equity capital, the annualised trading turnover of its equity shares has been at least two per cent. of the weighted average number of equity shares available as free float during such six months‘ period 10. (1)(k) annualized delivery-based trading turnover of the equity shares during six calendar months immediately preceding the month of the reference date has been at least ten per cent. of the weighted average number of equity shares listed during such six months‘ period;

 

99.(1) (d) ({10(1)(c)}- annualised trading turnover of the equity shares of the issuer during six calendar months immediately preceding the month of the reference date has been at least two per cent. of the weighted average number of equity shares listed during such six months‘ period: Provided that for issuers, whose public shareholding is less than fifteen per cent. of its issued equity capital, the annualised trading turnover of its equity shares has been at least two per cent. of the weighted average number of equity shares available as free float during such six months‘ period; 10(1)(k)} annualized delivery-based trading turnover of the equity shares during six calendar months immediately preceding the month of the reference date has been at least ten per cent. of the annualized trading turnover of equity shares during such six months‘ period; It is proposed to clarify the delivery turnover should be as a percentage of the trading turnover. The same is a clarificatory change.
Rights issue – Fast Track Rights Issue – Eligibility Conditions 10.(1)(f)(f) the impact of auditors‘ qualifications, if any, on the audited accounts of the issuer in respect of those financial years for which such accounts are disclosed in the offer document does not exceed five per cent. of the net profit or loss after tax of the issuer for the respective years.

 

99.(2)(m) {10(1)(f)} there are no auditors‘ qualifications on the audited accounts of the issuer in respect of those financial years for which such accounts are disclosed in the letter of offer. To improve the requirements for fast track issues, it is proposed that for a company to be eligible to make a fast track rights issue, it should not have any audit qualifications.

 

Proposed change will not allow companies having audit qualification to come up with fast track rights issue. Such change will have due implications on the compliance status of the listed company.
Bonus Issue
Bonus Issue No issuer shall make a bonus issue of equity shares unless it has made reservation of equity shares of the same class in favour of the holders of outstanding [compulsorily] convertible debt instruments[ if any,] in proportion to the convertible part thereof The equity shares so reserved for the holders of fully or partly compulsorily convertible debt instruments shall be issued at the time of conversion of such convertible debt instruments on the same terms or same proportion at which the bonus shares were issued An issuer shall make a bonus issue of equity shares only if it has made reservation of equity shares of the same class in favour of the holders of outstanding compulsorily convertible debt instruments, optionally convertible instruments, warrants, or lenders who loans are convertible into equity, if any, in proportion to the convertible part thereof. The equity shares so reserved for the holders of fully or partly compulsorily convertible debt instruments, optionally convertible instruments, warrants, or lenders who loans are convertible into equity, shall be issued at the time of conversion of such convertible debt instruments, optionally convertible instruments, warrants, or loans, as the case may be, on the same terms or same proportion at which the bonus shares were issued.

 

All cases of convertible instruments, warrants and loans convertible into equity should be covered. There could be lenders (especially in cases of CDR, whereby lenders have the option to convert their loans to equity. In such cases, there should be a reservation for them.

 

Proposed change may not be flexible considering that every convertible instrument may or may not be opted for conversion. In such cases where the option of conversion is not exercised, bonus issue reserved with respect to such instruments will turn futile.
Preferential Issue
Conditions for Preferential Issue 72. (2) The issuer shall not make preferential issue of specified securities to any person who has sold any equity shares of the issuer during the six months preceding the relevant date: … Provided that the above restriction shall not apply to any sale of equity shares by any person belonging to promoter(s) of the promoter group which qualifies for inter-se transfer amongst qualifying persons under Regulation 10 (1) (a) of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeover Regulations), 2011

 

159. (1) Preferential issue of specified securities shall not be made to any person who has sold any equity shares of the issuer during the six months preceding the relevant date:

Provided that the above restriction shall not apply to any sale of equity shares by any person belonging to promoter(s) of the promoter group which qualifies for inter-se transfer amongst qualifying persons under regulation 10 (1) (a) of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeover Regulations), 2011 or in case of transfer of shares held by the promoters or promoter group on account of invocation of pledge by a lender.

This proviso was inserted to restrict any person from taking benefit of short swing profits which is not applicable in this case. It is now proposed that for transfer pursuant to invocation pledge by the lender may be excluded as this is an involuntary sale by the lender and the promoter is not a party to the sale decision. The proposed change seems to provide genuine relaxation in case of transfer pursuant to invocation pledge by the lender, as the promoter is not involved in the said transaction.
Disclosures for Preferential Issue 73. (1) The issuer shall, in addition to the disclosures required under section 173 of the Companies Act, 1956 or any other applicable law, disclose the following in the explanatory statement to the notice for the general meeting proposed for passing special resolution:

 

(e) the identity of the natural persons who are the ultimate beneficial owners of the shares proposed to be allotted and/or who ultimately control] the proposed allottees, the percentage of post preferential issue capital that may be held by them and change in control, if any, in the issuer consequent to the preferential issue.

 

Provided that if there is any listed company, mutual fund, bank or insurance company in the chain of ownership of the proposed allottee, no further disclosure will be necessary.

163. (1) The issuer shall, in addition to the disclosures required under the Companies Act, 2013 or any other applicable law, disclose the following in the explanatory statement to the notice for the general meeting proposed for passing the special resolution:

 

identity of the natural persons who are the ultimate beneficial owners of the shares proposed to be allotted and/or who ultimately control the proposed allottees, the percentage of post preferential issue capital that may be held by them and change in control, if any, in the issuer consequent to the preferential issue:

 

Provided that if there is any listed company, mutual fund, scheduled commercial bank, insurance company registered with the Insurance Regulatory and Development Authority of India, foreign portfolio investor other than Category III foreign portfolio investor, foreign venture capital investor or alternative investment funds in the chain of ownership of the proposed allottee, no further disclosure will be necessary.

 

There is a need to consider inclusion of Category I foreign portfolio investors, Category II foreign portfolio investor, foreign venture capital investors and alternative investment funds in the exclusions in this proviso. These categories are registered with SEBI and hence their KYC is already done at the time of their registration. The proposed changes seeks to do away with the double disclosure requirements or the Category I foreign portfolio investors, Category II foreign portfolio investor, foreign venture capital investors and alternative investment funds.
Adjustments in pricing – Frequently or Infrequently traded shares 76B. The price determined for preferential issue in accordance with regulation 76 or regulation 76A, shall be subject to appropriate adjustments, if the issuer:

(a) makes an issue of equity shares by way of capitalization of profits or reserves, other than by way of a dividend on shares;

(b) makes a rights issue of equity shares;

(c) consolidates its outstanding equity shares into a smaller number of shares;

e) divides its outstanding equity shares including by way of stock split;

f) re-classifies any of its equity shares into other securities of the issuer;

g) is involved in such other similar events or circumstances, which in the opinion of the concerned stock exchange, require adjustments.

 

166. The price determined for a preferential issue in accordance with regulation 164 or regulation 164A, shall be subject to appropriate adjustments, if the issuer:

a) makes an issue of equity shares by way of capitalization of profits or reserves, other than by way of a dividend on shares;

b) makes an issue of equity shares after completion of a demerger wherein the securities of the resultant demerged entity are listed on a stock exchange;

c) makes a rights issue of equity shares; d) consolidates its outstanding equity shares into a smaller number of shares; e) divides its outstanding equity shares including by way of stock split;

f) re-classifies any of its equity shares into other securities of the issuer;

g) is involved in such other similar events or circumstances, which in the opinion of the concerned stock exchange, require adjustments.

 

It is proposed to include demerger where the equity shares of the resulting entity are listed post demerger. Through a demerger, an undertaking of the company is demerged into a separate company and such resulting company’s shares are listed. Post the listing of the resulting company, the value of the demerged company goes down and it trades accordingly. Hence, adjustment for pre-demerger market price needs to be made. The proposed amendment broadens the scope of these regulation to demerger as well, where the said adjustment is required post the demerger.
Payment of consideration 77. (1) Full consideration of specified securities other than warrants issued under this Chapter shall be paid by the allottees at the time of allotment of such specified securities:

 

Provided that in case of a preferential issue of specified securities pursuant to a scheme of corporate debt restructuring as per the corporate debt restructuring framework specified by the Reserve Bank of India, the allottee may pay the consideration in terms of such scheme.

 

{77.(2) and (3)}An amount equivalent to at least twenty five per cent. of the consideration determined in terms of regulation 76 shall be paid against each warrant on the date of allotment of warrants.

169.(1) Full consideration of specified securities other than warrants, shall be paid by the allottees at the time of allotment of such specified securities except in case of shares issued for consideration other than cash.

 

Provided that in case of a preferential issue of specified securities pursuant to a scheme under the corporate debt restructuring framework specified by the Reserve Bank of India, the allottee may pay the consideration in terms of such scheme.

 

(2) In the case of warrants, an amount equivalent to at least twenty five per cent. of the consideration determined in terms of regulation 76 shall be paid against each warrant on the date of allotment of warrants and the balance seventy five per cent. of the consideration shall be paid at the time of allotment of the equity shares pursuant to exercise of options against each such warrant by the warrant holder. Alternately, twenty five per cent. of the consideration can be computed on the basis of the current market price and the balance can be paid based on the price at the time of exercise.

 

It is proposed to remove the limit of attaching one warrant to a specified security and the issuer will have the flexibility to decide number of warrants to be attached to a specified security.

 

It is also proposed to clarify that the 25 per cent. consideration can be based on the pricing formula computed using the current market price, and the balance consideration can be paid at the time of exercise which can be subsequently determined at the time of final pricing.

The proposed changes provide two things:

 

(a) relaxation- the flexibility to decide number of warrants to be attached to a specified security shall now vest with the issuer.

 

(b) Clarificatory – the same will remove any ambiguity regarding the pricing.

Qualified Institutions Placement
Restrictions on amount raised – QIP 89. The aggregate of the proposed qualified institutions placement and all previous qualified institutions placements made by the issuer in the same financial year shall not exceed five times the net worth of the issuer as per the audited balance sheet of the previous financial year. Deleted Companies suffer losses for a variety of reasons including slowdown in their sectors, which leads to erosion of their net worth.

 

These companies, while in the process of turning around are unable to raise funds through QIP as their pre-QIP net worth will be small or negative. As such, these companies have to look for other avenues for fund raising which may be time consuming and expensive options. QIB investors are in a better position to evaluate such opportunities and QIBs also are not required to be given any protection. Hence, it is proposed to delete this requirement.

The proposed change will provide the companies an ease in raising the amount through QIPs.
Appointment of merchant banker – QIP 83. (2) The merchant banker shall, while seeking in-principle approval for listing of the eligible securities issued under qualified institutions placement, furnish to each stock exchange on which the same class of equity shares of the issuer are listed, a due diligence certificate stating that the eligible securities are being issued under qualified institutions placement and that the issuer complies with requirements of this Chapter. 174.(3) The lead manager(s) shall, while seeking in-principle listing approval for the eligible securities, furnish to each stock exchange on which the same class of equity shares of the issuer are listed, a due diligence certificate stating that the eligible securities are being issued under qualified institutions placement and that the issuer complies with requirements of this Chapter, and also furnish a copy of the preliminary placement document along with any other document required by the stock exchange. The issuer should have the choice of listing (and trading) eligible securities such as CCDs (other than equity shares) issued through the QIP process either at the time of allotment or at the time of conversion. If these remain unlisted, a clarification is needed that the in-principle listing approval has to be sought at the time of issuance but the same can be listed and traded on conversion of such securities. New clause has been added with a proviso to bring out that difference. As per the proposed changes, furnishing the preliminary document will provide detailed information. Further, the proposed changes provides the option to the issuer an option not to list the securities as well.
Minimum no. of allottees 87. (2) The qualified institutional buyers belonging to the same group or who are under same control shall be deemed to be a single allottee. Explanation: For the purpose of subregulation (2), the expression “qualified institutional buyers belonging to the same group” shall have the same meaning as derived from sub-section (11) of section 372 of the Companies Act, 1956; 180. (2) Qualified institutional buyers belonging to the same group or who are under same control shall be deemed to be a single allottee.

 

For the purpose of sub-regulation (2), the expression “qualified institutional buyers belonging to the same group” shall mean entities where

(i) any of them controls directly or indirectly, through its subsidiary or holding company, not less than fifteen per cent. of the voting rights in the other; or

(ii) any of them directly or indirectly, by itself, or in combination with other persons exercise control over the others;

(iii) there is a common director, excluding nominee director amongst the investor, its subsidiary or holding company and other investor.

Given that the Companies Act, 2013 does not have corresponding provision for Section 372 of the Companies Act, 1956, it is proposed to define ‘same group’ to bring more clarity. The proposed changes seeks to align the Regulation with Companies Act, 2013 and to provide clarification in the absence of the corresponding provision in the Companies Act, 2013.

 

Conclusion

Owing to the various regulatory changes brought in for the listed entities, updating and aligning the SEBI ICDR Regulations is much required.   Therefore, the proposed amendments will help in merging all the previous SEBI Circulars related to these Regulations and updating the same with the requirements of the Companies Act, 2013 and the various SEBI Regulations, to maintain uniformity.


[1] https://www.sebi.gov.in/reports/reports/may-2018/consultation-paper-on-review-of-sebi-issue-of-capital-and-disclosure-requirements-regulations-2009_38859.html

Additional items to be taken up in AGM of 2018- recent regulatory changes!

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

MCA vide notification dated May 7, 2018[1] has notified 28 Sections of the Companies (Amendment) Act, 2017 (Amendment Act) in Phase III. The same has been made effective from May 7, 2018[2]. SEBI also, pursuant  to  the  recommendations  made  by  Uday  Kotak  Committee  Report,  notified the SEBI (Listing Obligations and Disclosure Requirements) (Amendment)  Regulations,  2018  (Amendment  Regulations)  on  May  9,  2018. Though the amended sections of the Amendment Act are effective immediately, the applicability of the Amendment Regulations are not immediate but shall be on specific dates provided for specific regulation. The reason behind providing such different applicable dates can be taken as to provide a smooth transitioning period so that the amendments can be complied with or proper mechanism can be put in place before the same comes into force. In view of the same, the companies are required to take up certain actions with immediate effect including obtaining approval of the shareholders. Since the companies are planning to convene their AGMs of FY 2017-18 in next few months, this article covers what all additional items may be taken up to such AGM in view of the recent regulatory changes as aforesaid.

A.     Additional matters under the Companies (Amendment) Act, 2017

In view of the amendment Notification, the following additional matters may be taken up in the AGM 2018:

  1. Considering the amendments made in Section 185, the companies may seek approval of shareholders by way of a special resolution in the ensuing AGM if it is intending to provide loan, including any loan represented by a book debt to, or give any guarantee or provide any security in connection with any loan taken by following persons/ entities:
  • any private company of which any such director is a director or member;
  • any body corporate at a general meeting of which not less than twenty five per cent. of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or
  • any body corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions o instructions of the Board, or of any director or directors, of the lending company

The explanatory statement to the notice shall disclose the full particulars of the loans given, or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilised by the recipient of the loan or guarantee or security and any other relevant fact. Please note the amendment shall not affect the private companies covered under the MCA Notification dated 5th June, 2015 providing exceptions/ exemptions from applicability of certain provisions of the Act.

  1. The companies may further remove the item pertaining to ratification of the appointment of the statutory auditors in view of the omission of the proviso to section 139(1) of the Act.

B.     Additional matters under the Amendment Regulations

In view of the proposed amendments in the Listing Regulations, the following additional matters seem to get included in the notice of the ensuing AGM 2018:

  1. In terms of Regulation 17 (1) (a), the listed companies shall have to appoint woman independent director. Though the requirement was already there in the Act as well as the Listing Regulations earlier, however, the same was limited to only a woman director and such director was not necessarily required to be an independent director too. Therefore, companies having a non- independent woman director shall be required to take up the same in the AGM. The amendment shall be applicable based on the market capitalization of the company i.e. if the company falls under top 500 listed entities then the same shall be effective from April 1, 2019 and if it falls under top 1000 listed entities then w.e.f. April 1, 2020.
  2. Regulation 17 (1) (c) requires top 1000 listed entities to have minimum 6 directors w.e.f. April 1, 2019 and top 2000 listed entities w.e.f. April 1, 2020. Though most of the listed entities shall already be in compliance of this requirement, however, the ones who have 5 or lesser number of directors will be required to appoint in the current FY if such listed entity falls in the list of top 1000 entities.
  3. Regulation 17 (6) (ca) provides the requirement to obtain approval of shareholders by special resolution every year, in  which  the  annual  remuneration payable  to  a  single  non-executive  director exceeds fifty per cent of the total annual remuneration payable to all non-executive directors, giving details of the remuneration thereof. Since the clause uses the  word  ‘payable’,  it seems to indicate  that  listed  entities  who  will  have  payable  to single  NED annual remuneration for FY 2018-19 exceeding 50% of that payable to all other NEDs. Therefore, such listed entities will have to obtain shareholders’ approval by special resolution every year. Since the provision is effective from April 1, 2019, if there is a certainty on the same, the approval shall be obtained in AGM 2018 itself enabling it to make payment to such NEDs for FY 2018-19.
  4. Regulation 17 (1A) requires a special resolution for appointing/ continuing the directorship of any person  as  a  non-executive  director  who  has  attained  the  age of  seventy five  The explanatory statement annexed to the notice for such motion shall indicate the justification for appointing such a person. The provisions shall be effective from April 1, 2019 and also applicable to all listed entities. Since the provision includes continuation of the directorship also, in  case  the  NEDs/  IDs  of  such  listed  entities  are  individuals  who  have already attained the age of seventy  five years or will be attaining the age before April 1, 2019, such listed entities will have to seek approval of shareholders by special resolution in the ensuing AGM itself .
  5. In terms of Regulation 17 (6) (e), if the fee or compensation  payable  to  executive  directors  who  are  promoters  or  members  of promoter group is in excess of the thresholds i.e. rupees 5 crore or 2.5% of the net profits for one such director, whichever is higher and 5% of the net profit in aggregate for all such directors, then the listed entity shall have to obtain approval of shareholders by special resolution. Since the same is effective from April 1, 2019, the approval shall be obtained in the ensuing AGM itself enabling the company to pay remuneration to that extent for FY 2018-19. The listed entities which had already taken approval of the shareholders for payment of remuneration within the limits provided under the Act shall also get covered under this clause if the resolution so passed was not a special resolution.

Apart from the aforesaid, we have separately covered the actionables arising out of the aforesaid amendments. The actionables arising out of the Companies (Amendment) Act, 2017 can be viewed at http://vinodkothari.com/blog/actionables-from-28-notified-sections/ and the actionables arising out of the Amendment Regulations can be viewed at http://vinodkothari.com/blog/actionables-for-lodr-amendment-regulations-2018/.

 


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

[2] http://egazette.nic.in/WriteReadData/2018/185193.pdf

Non-compliance of Listing Regulations may lead to compulsory delisting

by Munmi Phukon ,(corplaw@vinodkothari.com)

Introduction and Background

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

How is it different from the Previous Circulars?

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

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

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

 

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

 

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

 

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

 

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

Contents of the New Circular

The New Circular may be segregated into the following parts-

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

Each of the aforesaid are described as follows:

Part A: Structure of fines to be imposed

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

Sl. No. Regulation Fine

 

Remarks
1.        Regulation 6(1)-

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

 

₹ 1,000 per day

 

New insertion.
2.        Regulation 7(1)-

Non-compliance with requirement to appoint share transfer agent.

 

₹ 1,000 per day New insertion.

 

3.        Regulation 13-

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

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

 

₹ 1,000 per day New insertion.

 

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

 

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

 

4.        Regulation 17(1)

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

 

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

Non-compliance with the constitution of audit committee.

 

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

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

 

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

Non-compliance with the constitution of stakeholder relationship committee.

 

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

Non-compliance with the Constitution of risk management committee.

 

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

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

 

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

 

10.   Regulation 29(2)/29(3)

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

 

₹ 10,000 per instance of non-

compliance per item.

 

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

 

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

 

11.   Regulation 31

Non-submission of shareholding pattern within the period prescribed.

 

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

 

12.   Regulation 32(1)

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

 

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

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

 

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

 

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

 

14.   Regulation 34

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

 

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

 

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

 

15.   Regulation 39(3)

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

₹ 1,000 per day

 

 

 

 

 

New insertion.
16.   Regulation 42(2)

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

 

Regulation 42(3)

Failure/ delay in dividend declaration within prescribed timeline.

 

Regulation 42(4)

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

 

Regulation 42(5)

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

 

₹10,000 per instance of non-

compliance per item

 

New insertion.
17.   Regulation 44(3)

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

 

₹10,000 per instance of non-

Compliance

New insertion.
18.   Regulation 46

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

 

1st step:

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

 

2nd step:

 

₹10,000 per instance for every

Additional advisory/ warning

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

 

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

 

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

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

Review of compliance by stock exchange

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

Notice in view of compliance status

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

Freezing

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

Unfreezing

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

Duties of Board of Directors of the listed entity

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

Part C: Moving of Scrip to ‘Z Category

Which all regulations are covered?

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

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

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

Moving back of the scrip

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

Part D: Suspension of trading of securities

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

Procedure of suspension

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

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

Uniform suspension

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

If the fine is paid before suspension

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

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

Post suspension trading

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

Part E: Revocation of suspension

When revocation happens?

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

Trading post revocation

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

Unfreezing of share and security holding of promoter and promoter group

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

Part F: Compulsory delisting of the company

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

Conclusion

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


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

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

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

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

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