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

FAQs on Layers of Subsidiaries

By Team Vinod Kothari & Company | December 21, 2017 (corplaw@vinodkothari.com)

 

MCA vide its Notification[1] dated September 20, 2017 notified the Companies (Restriction on Number of Layers) Rules, 2017, imposing a limit of two layers of subsidiaries which is effective from September 20, 2017[2]. In this regard, the following FAQs discusses various questions relating to the provisions dealing with layers of subsidiaries:

  1. Which all sections deal with restriction on layers of subsidiaries in Companies Act, 2013 (‘CA, 2013’)?

The following are the two sections which deals with restriction on layers of companies:

  • Proviso to Section 2 (87) [definition of subsidiary company or subsidiary]: As per the proviso, such class or classes of holding companies (as may be prescribed) shall not have layers of subsidiaries beyond such numbers as may be prescribed.
  • Section 186 (1) [Loan and investment by company]: As per this Section, a company shall unless otherwise prescribed, make investment through not more than two layers of investment companies.
  1. What is meant by ‘layer’ under Section 2 (87) of the CA, 2013?

The word “layer”, referred to in Section 2(87), means subsidiary or subsidiaries of the holding company.  The same word has also been used in Section 186 (1). Given the intent of the section, ‘layer’ refers to vertical limit.

  1. What is the reason behind limiting the number of layers?

The Joint Committee on Stock Market Scam[3] provided that on account of layers it became difficult to link the source of fund with the actual users to which these fund were put.

The multiple layers of companies are used by the companies for syphoning of funds and for money laundering. Therefore, in order to curb such practices by the companies, the government has provided restriction on floating layers of companies.

  1. Is there any restriction on horizontal propagation?

The restriction in layers of subsidiaries is for vertical propagations and not for horizontal propagations. A company may have as many investments horizontally. The same can be illustrated with the following diagram:

 

Figure 1: Horizontal propagation of Company A

  1. Are there any exceptions to proviso of section 2 (87)?

In addition to the exceptions given in section 186 (1), the Companies (Restriction on number of layers) Rules, 2017 (‘Rules, 2017’) also provides exception to the following companies:

  • a banking company;
  • a non-banking financial company as defined in the Reserve Bank of India Act, 1934 (2 of 1934) which is registered with the Reserve Bank of India and considered as systemically important non-banking financial company by the Reserve Bank of India; (Nothing specified in relation to housing finance companies/ NBFC CICs).
  • an insurance company being a company which carries on the business of insurance in accordance with provisions of Insurance Act, 1938 and Insurance Regulatory Development Authority Act, 1999;
  • a Government company referred to in clause (45) of section 2 of the Act.
  1. Are the provisions applicable on subsidiaries incorporated outside India?

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

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

It will be incorrect to say that Company incorporating subsidiaries outside India will have to adhere to the restriction of layers even if the same is permitted as per law of that country.

  1. Are the wholly owned subsidiaries even counted in the limits of layer?

The second proviso to Rule 2 of the Rules provides:

“Provided further that for computing the number of layers under this rule, one layer which consists of one or more wholly owned subsidiary or subsidiaries shall not be taken into account.”

As per the above-mentioned provision, a layer which consists of one or more wholly owned subsidiary or subsidiaries shall not be taken into account while computing the number of layers i.e., one layer which is represented by a wholly owned subsidiary shall not be taken into account.

‘Layer’ cannot mean ‘Layers’ based on interpretation that singular includes plural. Therefore, it should not be read as any layer represented by a wholly owned subsidiary. The whole purpose will get defeated if companies are allowed to incorporate layers of wholly owned subsidiaries without any restriction. Therefore, the exemption is only in a layer which represents a wholly owned subsidiary. However, it is pertinent to note that the layer of wholly owned subsidiary has to reflect in the first layer and not thereafter in order to avail the exemption.

The permitted layers can be illustrated with the following diagram:

Figure 2: Permitted layers of subsidiaries

  1. Whether the Rules are prospective or retrospective?

As per Rule, after the date of commencement of the Rules, the holding companies, other than the exempted companies, which has number of layers of subsidiaries in excess of the limit of layers:

  • shall not have any additional layer of subsidiaries over and above the layers existing on such date; and
  • shall not, in case one or more layers are reduced by it subsequent to the commencement of these Rules, have the number of layers beyond the number of layers it has after such reduction or maximum layers allowed in sub-rule (1), whichever is more.

Therefore, companies will have to comply with these conditions prospectively.

  1. Whether acquisition, as mentioned in the Rules, covers intra group transactions?

Yes, acquisition here refers to any acquisition which has the result of making the entity being acquired, the subsidiary of the acquiring entity. Accordingly, intra group transactions as well as external transactions shall be covered.

  1. Whether it is possible to acquire a company incorporated outside India which has no subsidiary? Or has subsidiaries within two layers even if the laws of the host country permit beyond 2 layers?
Draft Rules[4] Final[5]
After the date of commencement of this rule, every holding company, other than a holding company belonging to a class specified in sub-rule

(2), shall have not more than two layers of subsidiaries:

On and from the date of commencement of these rules, no company, other than a company belonging to a class specified in sub-rule (2), shall have more than two layers of subsidiaries:
Provided that the provisions of this sub-rule shall not affect a holding company from acquiring a subsidiary incorporated in a country outside India if such subsidiary has subsidiaries as per the laws of such country. Provided that the provisions of this sub-rule shall not affect a company from acquiring a company incorporated outside India with subsidiaries beyond two layers as per the laws of such country:

By virtue of Rule 2(1) a company cannot have more than two layers of subsidiaries unless the company is covered in exemption list provided in Rule 2 (2).

The carve-out given in the proviso under draft rules explains that the overseas subsidiary being acquired may have any number of subsidiaries permitted as per law of host country. The final rules amended the wording to clarify that even if such subsidiaries have more than two layers of subsidiaries as per laws of such country, the holding company can acquire such subsidiary. The intent is to make it abundantly clear that if the acquiring entity is likely to breach the limit of layer of subsidiary on account of acquisition of company incorporated outside India, the rule shall not apply. There is no precondition that the company being acquired abroad should have two layers of subsidiaries.

  1. Is there any filing requirement for companies which has number of layers of subsidiaries in excess of the limit?

Every company, other than the companies exempted under the section, existing on or before the commencement of these rules, which has number of layers of subsidiaries in excess of the layers specified, shall file return in Form CRL-1 with the Registrar within a period of 150 days from the date of publication of these Rules in Official Gazette i.e., September 20, 2017. The form requires specifying layer number of the subsidiary and percentage of shares held by holding company. The format as prescribed in the Rules requires certifying the form, therefore, the e-form is much awaited. However, in the absence of the e-form, CRL-1 should be filed in e-form GNL-2 before the expiry of 150 days from the date of publication of these Rules.

  1. Is there any penal provision for contravention of these Rules?

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

  1. What is meant by ‘layers of investment companies’ under Section 186 (1) of the CA, 2013?

Section 186 (1) of the CA, 2013 puts down restriction on companies to make investments through more than two layers of investment companies. In this case, it refers to vertical layers of investments companies.

The expression ‘investment company’ means a company whose principal business is the acquisition of shares, debentures or other securities.

There is no exemption to any company from adhering to the requirement of Section 186 (1).

  1. Are there any exceptions to the provisions of section 186(1)?

Yes. The proviso exempts the applicability of this section to:

  • Acquiring of any company incorporated outside India if that company has investment subsidiaries beyond two layers as per the laws of that country.
  • Subsidiary company from having an investment subsidiary to fulfill any regulatory requirement.
  1. Section 2(87) postulates that a relationship of subsidiary can be established if one controls the Board of the other company. Whether such category of subsidiary falls within the purview of Section 186(1)?

Section 186(1) of CA, 2013 nowhere talks about investment through subsidiary. Hence for the purpose of section 186(1) control over the board of company will not be reason enough for attracting the provision of section 186(1).

If such subsidiaries are investment companies, section 186(1) shall be attracted.

  1. What is the difference between the provisions of proviso to Section 2 (87) and 186(1)?

A tabular presentation of the difference between the proviso to section 2(87) and section 186(1) of the CA, 2013 is presented below:

Criteria Proviso to Section 2(87) Section 186(1)
Applicability On all companies [Except few exceptions mentioned in above question] On all companies [Except few exceptions mentioned in question no. 6]
Restriction on Holding company having more than 2 layers of subsidiaries Investing through more than 2 layers of investment subsidiaries
Entity at the end of the loop of the layer Can be a body corporate Has to be a company
Investment through Can be through bodies corporate Has to be necessarily through investment companies
Onus of complying with the section Holding company Holding company
Criteria of establishing relationship Subsidiary can be either by way of control of composition of board of directors or by way of investment in total share capital of company Holding company has to invest through investment subsidiaries. Investment can be in any security.

Table 1: Difference between the sections 2(87) and 186(1) of the CA, 2013

  1. Understanding layers with the help of few illustrations:

Illustration 1:

Figure 3: Illustration 1

The above illustration shows the permitted structure.

Illustration 2:

Figure 4: Illustration 2

In the above illustration, Company B being a WOS will be exempted and hence, the permitted layer will be till Company B2.

However, coming to the other vertical investment – Company A is not the ultimate holding of Company C1. Therefore, For Company A, the permitted layer will be till Company C1 (unless falling under the exemption) and for Company C, the permitted layer will be till Company C3.

Illustration 3:

Figure 5: Illustration 3

In this illustration, C2 is not permitted because C1 is not a subsidiary of an NBFC.

Illustration 4:

Figure 6: Illustration 4

a. Can Subsidiary 4 be shifted from WOS 1 to WOS 2? This will not result in any change in the structure or total number of subsidiaries/ step-down subsidiaries; but simply change the immediate holding entity.

Shifting of subsidiary 4 will be regarded as acquisition within the group. Where the subsidiary is a company incorporated outside India, the restriction of breaching the limit of layer of subsidiary shall not apply.

       b. Will the aforesaid exemption hold good even in case of acquiring a company incorporated outside India having an Indian company as its subsidiary at some level/ layer?

In that case, the company will be making an Indian company its subsidiary pursuant to said acquisition. The intent is to exempt from the requirement of acquiring overseas entity which has subsidiaries as per laws of host country. If the Indian company intended to acquire another Indian company in order to make such Indian company its subsidiary, the same would not have been permitted in view of restriction on layers of subsidiary. What cannot be done directly should not be done indirectly as well. Therefore, the aforesaid exemption shall not hold good.


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

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

[3] http://www.prsindia.org/administrator/uploads/general/1292845141_JPC_REPORT%20on%20stock%20market%20scam.pdf.pdf

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

[5] http://ebook.mca.gov.in/Default.aspx?page=rules

Defaulting LLPs under the radar of MCA – Clean India Drive Continues!

By Smriti Wadehra, (corplaw@vinodkothari.com)

The recent massive clean-up operation of Ministry, whereby RoCs started issuing public notices in April, 2017 to strike off the name of the companies from the register of companies and to dissolve them unless a cause is shown to the contrary, within thirty days from the date of the notice, has come to centre of focus. Thereafter, on September 5, 2017 the government confirmed that names of over 2.09 lakh companies have been struck off from the Register of Companies for failing to comply with regulatory requirements and was decided that the Directors of such shell companies which have not filed returns for three or more years, will be disqualified from being appointed in any other company as Director or from being reappointed as Director in any of the companies where they had been Directors, thereby compelling them to vacate office. It has been reported that as a result of this exercise, at least two to three lakh of such disqualified Directors has been debarred and Roc wise list of directors was uploaded on MCA website along with MCA circular stating as:

 

“Pursuant to Section 164 (2) (a) of Act, 2013 the directors of the companies  which  have not filed financial statements or annual returns for any continuous period of three financial Years 2014, 2015 and 2016 have been hereby declared disqualified. Accordingly, Directors enlisted in Annexure A attached shall stand disqualified upto 31.10.2021.”

 

Further, pursuant to the action of the Ministry of Corporate Affairs of removing/striking-off and consequent cancellation of the registration of around 2,09,032 shell companies, the Department of Financial Services, Ministry of Finance has directed all the Banks to restrict operations of bank accounts of such companies by the Directors of such companies or their authorized representatives making the clean up operation a massive drive.

 

This drive was undertaken for companies but its seems that Ministry has extended its ambit to include Limited Liablility Partnerships (“LLPs”) registered under Limited Liability Act, 2008 (“Act”) under its scrutiny process. It is being noticed that the Ministry has recently started issuing notices to LLPs individually by way of a reminder notice to make the compliances w.r.t filing of necessary returns/ statements as per the Act failing which the LLP and its designated partners will be liable to prosecution apart from unlimited penalty.

As per the provisions of sections 23 and 34 of the Act read with Limited Liability Partnership (Amendment) Rules, 2017 all the Limited Liability  Partnerships is statutorily required to file:

  • the Initial Agreement constituting the LLP in Form-3 within 30 days of its incorporation;
  • a Statement of Account & Solvency has to be filed in Form-8 within 30 days from the end of six months of the financial year; and
  • Annual Return 11 has to be filed within 60 days of closure of its financial year.

Vide the aforesaid notices, the Ministry has provided a firm reminder to comply with the reporting requirements as aforesaid failure of which may lead to prosecution of defaulting LLPs along with their designated partners,  besides being liable for unlimited penalty on per diem basis.

 

 

Transfer of shares to IEPF- Is the Wait Over ?

By Pammy Jaiswal & Megha Saraf, (corplaw@vinodkothari.com)

Introduction

It seems that the prolonged postponement for transferring shares to IEPF is over. Ministry of Corporate Affairs (“MCA”) vide its Notification dated 13th October, 2017[1] has added yet another notification on Investor Education Protection Fund (“IEPF”), to its list. The Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Second Amendment Rules, 2017 (“Second Amendment Rules”) has been made effective from 13th October, 2017. Even though the Second Amendment Rules have yet again come out with an extended time line for effecting transfer of shares, some of the operational issues are not yet clarified for effecting such transfer to IEPF.

Further, MCA has also issued a Circular dated 16th October, 2017[2] which provides for certain details on the Second Amendment Rules.

The write-up is therefore, an attempt to put before a clear snapshot of the current picture on transfer of shares to IEPF.

Main Highlights of the Second Amendment Rules

The major highlights of the Second Amendment Rules are:

  • Due Date for Transfer of shares

The Second Amendment Rules have extended the due date to transfer the shares to IEPF till 31st October, 2017 for the cases where the period of seven years has been completed or being completed during the period from 7th September, 2016 to 31st October, 2017.

Accordingly, the last date for completing all the formalities in connection with transfer shall be 30th November, 2017.

  • Transfer of shares is in the nature of transmission of shares

The Second Amendment Rules have clarified that the transfer of shares to IEPF shall take place by following the procedure for transmission of shares. Even though the documentation for such transmission has not been stated in the said rules or the circular, resolution passed by a company for transferring shares seems to a supporting document in this regard.

Further, MCA Circular dated 5th June, 2017[3], had already clarified that transfer of shares to IEPF is not in the nature of transfer but a transmission and hence, the requirement of issuing duplicate share certificate may be done away with.

  • Issuance of “New” share certificates instead of “Duplicate” share certificates

In case of physical shares, the Company shall issue “New” share certificates in Form SH-1 instead of “Duplicate” share certificates. Even though duplicate certificates need not be issued, however, the new certificates issued under the said rules will have the words “Issued in lieu of share certificate no….. for the purpose of transfer to IEPF”.

Further, the requirement entering the details of the certificate issued under the said rule in the register of renewed and duplicate share certificates maintained in Form No. SH-2 has been done away with.

  • Opening of Demat Account of IEPF Authority with Punjab National Bank

IEPF Authority has opened its Demat Account with Punjab National Bank (‘PNB’) and SBICAP Securities Limited (‘SBICAP’) for the purpose of making any transfer of shares.

  • Reporting of non-compliances to Central Government

Any non-compliance of the IEPF rules shall be reported by the IEPF Authority to the Central Government.

  • Appointment of a Nodal Officer

MCA has given a time period of 15 days to all the companies for nominating a Nodal Officer for coordinating with IEPF Authority and the details of such officer shall be displayed on the website of the company.

  • Rejection of claim in e-Form IEPF-5 in certain cases
  1. The current IEPF Rules provide that the company shall be required to provide a verification report to the Authority within a period of 15 days of receiving the claim. The Second Amendment Rules provides that in case the Authority does not receive requisite documents with a period of 90 days from the date of filing e-Form IEPF-5, the claim is liable to get rejected in the hands of the Authority.

However, before rejecting such claim, the Authority shall allow a further time of 30 days to furnish the requisite documents.

  1. In cases where the claim is incomplete or not approved and communication in this regard has been sent to such claimant and company, IEPF may reject such application if rectified documents are not filed within a period of 90 days. However, prior to such rejection, a time of further 30 days in this regard.

Highlights of the General Circular dated 16th October, 2017

  • PNB and SBICAP are the DPs with whom the IEPF Authority has opened demat account. These accounts will be fully digital and paperless;
  • Format of corporate action will be prescribed by NSDL and CDSL shortly;
  • Account maintenance charges will be minimal as per the MoU entered between the IEPF Authority and the NSDL and CDSL. Such MoU will be put up on the website of the of the IEPF Authority;
  • Cash benefit arising out of and in the form of the following, shall mandatorily be transferred to the bank account opened with PNB, Sansad Marg, New Delhi.
    • dividend from shares already transferred to IEPF;
    • proceeds realized on account of delisting of equity shares;
    • amount entitled on behalf of a shareholder in case of winding up of a company.
  • Amounts mentioned under section 125 (2) shall not be transferred to the aforesaid bank account. Only the amounts mentioned in the above point shall be transferred and nothing else.

Conclusion

Based on the above discussions, one can conclude that IEPF has tried all its might to join the dots and made the transfer of shares become a reality, although it has taken more than a year to fix the operational issues in this regard. Now, the only clarification to be looked out for is the format of corporate action, after which companies can actually complete all the formalities and finally the wait for transferring the shares to IEPF comes to an end.


[1] http://iepf.gov.in/IEPF/pdf/IEPFNotification_13102017.pdf

[2] http://www.mca.gov.in/Ministry/pdf/GC12TranferofShares_16102017.pdf

[3] http://iepf.gov.in/IEPF/pdf/IEPFGcircular07_05062017.pdf

To read our resources on this subject: click here

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POWER TO ARREST AS PER COMPANIES ACT, 2013

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

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

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

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

POWER TO ARREST

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

PROCEDURAL REQUIREMENTS

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

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

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

[WHICHEVER IS LATER]

CONCLUSION

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


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

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

Hundreds of LLPs may be vanishing soon

By Sandeep Kumar Mishra, (corplaw@vinodkothari.com)

Introduction

After issuing of show cause notices[1] (SCNs) for striking of names of more than 3 lakh non-operating companies, the Registrar has now taken the same action for LLPs. It seems that government has decided to heavily come down on existence of non-operative Limited Liability Partnerships (‘LLPs’) or say fake firms which are causing significant buzz all over in the corporate sector. The Finance Minister had already indicated through his bold statement that actions will be initiated against the body corporate which have been strictly meant for the purpose of circulation of black money and are not carrying any business activity. It now seems that the Registrar of Companies  (RoC) Kolkata, have given the non-operative firm an ultimatum to either make the compliances and start doing the business activity for which they were formed or else be ready to pack up for ever.

Looking at the long list of LLPs which have been issued SCNs under section 75 of Limited Liability Partnership Act, 2008 (the “Act”); it is evident that these LLPs have failed to comply with the provisions of the Act. These LLPs are required to either furnish reason for non-compliance or get struck down from the Register of Companies being maintained by the RoC.

Provisions of law

Section 75 of the Act read with rule 37(1) of Limited Liability Partnership Rules, 2009 (‘LLP Rules’) provides that –

(a) where the Registrar has reasonable cause to believe that an LLP is not carrying on any business or operation for a period of two years or more; or

(b) where the LLP is not carrying out business for a period of one year or more and has made an application in Form 24 to the Registrar, with the consent of all partners of the limited liability partnership for striking off its name from the register

the Registrar shall send a SCN to such LLP and all its partners, of his intention to strike off the name of the limited liability partnership from the Register and at the same time request the recipients to send their representations along with copies of the relevant documents, if any, within a period of one month from the date of the SCN.  However, such SCN shall not be given where the LLP has made an application for striking off its name.

Provided further that where the limited liability partnership is regulated under a special law, the above application for removal of its name shall be accompanied by approval of the regulatory body constituted or established under that law.

Registrar my struck off name of limited liabilities partnership firm from register of Limited liabilities partnership maintain by ROCs, after giving reasonable opportunity of being heard—

Curing step taken by the ROCs

Recently, RoC of West Bengal, Shillong and Odisha has sent SCN to hundreds of LLPs.  This bold step taken by the government is giving clear indication to the Partner/Promoter of LLPs, who device such mechanism merely for circulation of fund under shadow concept separate legal entity of body corporate. Either to comply with provision of law in true sprite in letter or cease to be perpetual existence as separate legal entity. With these SCNs coming, now LLPs are rushing to professionals to seek advisory on the response to be submitted, If such LLPs accept their default and agree for being struck down then the designated directors shall be held liable for the non-compliances made so far and on the other side if someone wants to revive the LLPs then the burden of making the defaults good shall be nothing less than incurring huge expenses.

A critical question mark on the fate of creditors and stakeholders

With the SCNs flowing in, the names of most of the LLPs will get struck off, either willingly or unwillingly at the hands of the RoCs. However, one needs to understand the fate of creditors and other stakeholders holding any interest in such LLPs.

Conclusion

With the wide spread epidemic of non-operative and bogus LLPs encompass in the Indian corporate sector taking shadow of concept of separate legal entity for circulation of  fund and deriving tax benefit, Now the ROCs have come up with a well devised mechanism to cure the same from its root. At this moment, we await to see what shall be the next step of the ROCs against the response being submitted by the LLPs which more or less shall be over by the end of this month as all of the LLPs are given just one month time to respond to the SCNs. To sum up, ROCs have turned the tables in the game, better late than never.

Further we have analyzed similar issue pertaining to strike off of more than 3 lakh companies from register of companies maintained by ROCs

http://vinodkothari.com/corporate-laws/


[1] http://www.icai.org.in/LLP%20Rules.pdf

http://www.mca.gov.in/Ministry/pdf/PublicNotice_27072017.pdf

http://www.mca.gov.in/Ministry/pdf/ROCWBLLPNotice_26072017.pdf

http://www.mca.gov.in/Ministry/pdf/Notice_listofLLP.pdf