Injeti Srinivas’s Committee: Changes recommended in provisions of Corporate Social Responsibility

Provisions relating to DVR & DRR- stands amended

Amendments introduced in Companies (Share Capital and Debentures) Amendment Rules, 2019

by Smriti Wadehra (smriti@vinodkothari.c0m)

The recent Notification of Ministry dated 16th August, 2019 has amended the provisions of Companies (Share Capital and Debentures) Rules, 2014 with respect to quantum of holding of equity shares with differential voting rights by a Company and provisions pertaining to creation of debenture redemption reserve. The amended provisions are applicable from the date of notification in the e-gazette i.e. 16th August, 2019.

Differential Voting Rights

SEBI in its Board Meeting dated 27th June, 2019 proposed insertion of the provisions of DVRs in SEBI ICDR Regulations. The proposal was w.r.t inter alia to cap the total voting rights of superior rights shareholders (including ordinary shares) at 74% of the total voting power. The respective amendments are still awaited. Meanwhile, the Ministry vide the aforesaid Notification amended the provisions under CA, 13 related to DVRs. The Notification has escalated the limit of DVR shares in the Company from 26% of total post-issue paid up equity capital of the Company to 74% of the total voting power.

The erstwhile provisions of the Companies (Share Capital and Debentures) Rules, 2014 permitted issuance of equity shares with differential rights subject to compliance of conditions mentioned in Rule 4(1) of the said Rules. One of criterion for issuance of equity shares with differential rights by a Company was that shares with differential rights should not exceed 26% of total post-issue paid up equity capital of the Company at any point of time. However, the amendment has increased this limit to 74% of the total voting power at any point of time. Notably, this is another significant highlight of the amendment  that the erstwhile cap of 26% was based on the post-issue paid up equity capital which has now been changed to 74% of the voting power.

Further, in this regard, condition on companies issuing shares with differential rights having consistent track record of distributable profits for the last three years have been done away with.

Debenture Redemption Reserve

The erstwhile provisions of Section 71(4) read with Rule 18(1)(c) of the Companies (Share Capital and Debentures) Rules, 2014 required every company issuing redeemable debentures to create a debenture redemption reserve (“DRR”) of at least 25% of outstanding value of debentures for the purpose of redemption of such debentures. Apart from creation of DRR, such companies were required to either deposit, before April 30th each year, in a scheduled bank account, a sum of at least 15% of the amount of its debentures maturing during the year ending on 31st March of next year or invest in one or more securities enlisted in Rule 18(1)(c) of Debenture Rules.

Under the erstwhile framework, the following classes of companies were required to comply with the provisions relating to DRR:

  1. NBFCs registered with RBI under section 45-IA of RBI Act, 1934 issuing debentures through public issue;
  2. Other listed companies coming up with public issue or private placement;
  3. Unlisted companies issuing debentures on private placement basis.

With a view to liberalise the legal framework surrounding issuance of debentures by NBFCs, the FinMin proposed Union Budget of 2019-20 proposed to scrap off the requirement of creation of DRR for publicly issued debentures also so as to motivate NBFCs.  Subsequently, the MCA came out with notification to amend the Companies (Share Capital and Debentures) Rules, 2014.

The amended provisions has exempted NBFCs registered with RBI and HFCs registered with National Housing Bank from creation of DRR in case of public issue of debentures. Further, the requirement of listed companies to create DRR has been done away with. The amended Rules have also lowered down the quantum of funds to be transferred to DRR by unlisted companies. However, as a flipside to the exemptions granted, the MCA has knowingly or unknowingly, unsettled an otherwise settled matter on creation of debenture redemption fund as per Rule 18(7).

Under the erstwhile provisions required creation of debenture redemption fund only by those companies on which DRR was applicable. However, under the current set of rules, the requirement to create DRF will apply to all listed companies, other than AIFIs or other FIs as per the clause of section 2(72). This new rule applies even to NBFCs.

It is pertinent to note that until now, NBFCs were required to create debenture redemption reserve only for publicly issued debt securities. However, under the new rule, all listed NBFCs will have to create a DRF even in case of private placement of debentures. This change in the rules seems to be contradicting the intention of proposal in the Union Budget.

The intention of the proposal was to promote NBFCs to explore Bond markets more often for fund raising, however, the language of the new rule has jeopardised the existing cases of debenture issuances, let alone be new debenture issuances. Considering the ongoing liquidity crisis, the entire financial system is going through, the implications of this requirement could be severe.

Creation of DRR is somewhat a liberal requirement then creation of DRF, this is because, where the former is merely an accounting entry, the latter is investing of money out of the Company and the fact the new rule casts an exemption from the first and not from the second makes the situation a bit awkward. Therefore, where there is no requirement even for annually conserving a part of their profits, the requirement of creating a fund out of the same becomes completely illogical.

Hence, in our view, the amendments have actually slashed the expectation to relax issuance of debentures by NBFCs and on the other hand has also taken away the available exemption to the NBFCs for not creating DRF in case of issuance of debt securities through private placement. The actual intent of the amendment would have been to reduce the requirement of DRR from somewhat say 25% to 10%, however, in a completely unexpected move, the requirement for parking liquid funds, in form of a debenture redemption fund (DRF) has been extended to all bond issuers except unlisted NBFCs (which are hardly any in India), irrespective of whether they are covered by the requirement of DRR or not.

In this regard, the notification also fails to clarify the basic question that is whether the requirement will be applicable to debentures/bonds already issued, before the date of the notification or only after the date of notification. Though, the language suggest that the same shall be applicable on debentures due for redemption after the date of notification, i.e. for debentures maturing during the year ending on 31st March, 2020. However, in our view, one should try to create a DRF for the debentures maturing within 31st March, 2020 itself. Lastly needless to say, the MCA notification needs to be considered immediately.

A brief analysis of the amendments are discussed below:

Applicability of DRR and Debenture Redemption Fund

a)    All India Financial Institutions and Banking Companies

b)   NBFCs registered with RBI under section 45-IA of RBI Act, 1934 and Housing Finance Companies registered with National Housing Bank

  1. Other companies

Synopsis of amendments in DRR provisions

Sl. No. Particulars Type of Issuance DRR as per erstwhile provisions DRR as per amended provisions DRF as per erstwhile provisions DRF as per amended provisions
1. All India Financial Institutions Public issue/private placement

 

× × × ×
2. Banking Companies Public issue/private placement

 

× × × ×
3.

 

Listed NBFCs registered with RBI under section 45-IA of the RBI Act, 1934 and HFC registered with National Housing Bank

 

Public issue

 

25% of value of outstanding debentures

×
Private Placement

 

× × ×
4. Unlisted NBFCs registered with RBI under section 45-IA of the RBI Act, 1934 and HFC registered with National Housing Bank

 

 

Private Placement

 

 

×

 

×

 

×

 

×

5.

 

Other listed companies

 

Public Issue

 

 

25% of value of outstanding debentures

 

×
Private Placement

 

 

25% of value of outstanding debentures

 

×
6. Other unlisted companies Private Placement

 

25% of value of outstanding debentures

 

 

10% of the value of outstanding debentures

 

 

 

 

 

 

 

Commencement of certain sections under Companies (Amendment) Act, 2019

-Phase II

by Smriti Wadehra (smriti@vinodkothari.com)

The Companies (Amendment) Bill, 2019 was introduced on 25th July, 2019 which received President’s assent on 31st July, 2019 and became the Companies (Amendment) Act, 2019. The Companies (Amendment) Act, 2019 is a combination of Companies (Amendment) Ordinance, 2019 introduced on 21st February, 2019 and 9 out of 20 proposed changes which were proposed by the Ministry on 5th November, 2018. There were two additional amendments which were not covered by the Ordinance and proposed changes.

The Companies (Amendment) Act, 2019 notified 43 sections out of which 31 sections were effective from 2nd November, 2018. Other sections were to be notified by the Ministry by way of separate commencement notification. Accordingly, the Ministry on 14th of August, 2019 further notified 10 section to be effective from the date of notification. A brief synopsis of the amendments are provided below:

Section No. of Companies (Amendment) Act, 2019 Section No. of Companies Act, 2013 Particulars Amendment Impact / Rermarks Actionable for companies
6 26 Matters to be stated in prospectus 1.    Substitution of word “registration” with “filing” in sub-section (4), (5) and (6)

 

2.    Omission of Registrar’s power to not register a prospectus for non-fulfilment of requirements of section 26

 

Seems to be a change in the terminology.
7 29 Public offer of securities to be in dematerialised form 1.    Omission of word “public” in sub-section(1)(b)

 

2.    Insertion of new clause to provide such class or classes of unlisted companies as may be prescribed, the securities shall be held or transferred only in dematerialised form in the manner laid down in the Depositories Act, 1996 and the regulations made thereunder

Pursuant to the amendment, all companies falling under such class of companies as may be prescribed has to mandatorily issue securities only in demat form.

 

In the absence of the Rules, this change seems to include private companies, small companies and OPC as well. However, the new clause comes with a proviso that states that the Ministry will come out with revised Rules prescribing thresholds for companies (which may include private companies) which requires issuance compulsorily in dematerialized form.

 

Further, there remain certain other grey areas which shall be clear only once the revised Rules in this regard are out. These include:

·        whether this requirement will be made applicable only for new issues of capital by companies; or

·        Will require all existing shares also to be dematerialised.

 

However, whether the same will be applicable to companies having prescribed thresholds which may include private companies, small companies, section 8 companies, OPCs etc.

 

The actionables can be determined only once the Rules are in place.

 

8 35 Civil liability for mis-statements in prospectus

 

To give effect to the amendment introduced in section 26, the term registration has been substituted with filing in this section also.

 

Mere linking of amendment in different sections.
14- clause (i), (iii) and (iv) 90(4A), (9A) and (11) Register of significant beneficial owners in a company 1.    Every company has to  take necessary steps to identify an individual who is a significant beneficial owner in relation to the company and require him to comply with the provisions of this section

 

2.    Government to come out with Rules in this regard

 

The existing provisions casted an obligation on the SBO to come and declare to the reporting company, however, the amendment indicates that nin addition to sending BEN-4 notices to the shareholders, the reporting company may also be required to go out on an investigation spree even in cases where it does not have a reason to believe about the presence of an SBO.

 

Further, the amendment also indicates that the SBO Rules shall be revised in this regard which is expected to provide the clarity on the actionables.

SBO determination is a collaborative exercise which the Company and SBO has to ensure.

 

Accordingly, as a result of this change, companies may need to send letters, notices and any other type of correspondence in addition to those cases where it was obligated to send notices to entities holding more than 10% shareholding in the Company.

 

In any event, the medium and extent of this new exercise will be clear once the MCA comes out with revised rules in this regard.

Also, considering the commencement of the said amendment has been made effective from 14th August, 2019, surely the same is to be used by the companies for identification of subsequent SBO, if any, which are identified, as the first round of identification has already been done.

 

However, what necessary steps are to be taken by the Company for identification of SBO requires clarity.

 

20 132 Constitution of National Financial Reporting Authority 1.      NFRA to perform its functions through such divisions as may be prescribed;

 

2.      Each division of the National Financial Reporting Authority shall be presided over by the Chairperson or a full-time Member authorised by the Chairperson;

 

3.      There shall be an executive body of the National Financial Reporting Authority consisting of the Chairperson and full-time Members of such Authority for efficient discharge of its functions as specified in the section;

 

4.      NFRA may debar a member or firm:

I.     being appointed as an auditor or internal auditor or undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate; or

II.    performing any valuation as provided under section 247,

for a minimum period of 6 months or such higher period not exceeding 10 years as may be determined by the Authority

 

Amendment notifies constitution of NFRA
31 212 Investigation into affairs of Company by SFIO Pursuant to investigation report of SFIO, if fraud is reported, the Government may make an application to NCLT for disgorgement of profits/assets. Further, there will be unlimited personal liability on officers/person/entity benefitted

 

The amendment proposes disgorgement of properties of officers in default in case of corporate frauds.
33 241 Application to Tribunal for relief in cases of oppression, etc.

 

1.      Application for oppression has to be made before the Principal Bench of Tribunal by certain class of companies to be prescribed by Ministry;

 

2.      New sub-section (3) has been inserted which provides that where Central Govt is of the opinion that there exists:

a)     Fraud, misfeasance, negligence or default in management or breach of trust; or

b)     Business is not being conducted as per business principles

c)     Company is being managed by person who is likely to cause serious injury or damage to the business

d)     Business is being carried out with the intent to defraud creditors, members or any other person or prejudicial to public interest

The Government may initiate a case against such person and refer the same to the Tribunal and inquire into the case to record a decision as to whether or not such person is a fit and proper person to hold the office of director or any other office connected with the conduct and management of any company.

 

The law was silent of the fact that what does “matters prejudicial to public interest” with regard to section 242(2) means. The amendment list down matters where Central Government may make application against the Company to Tribunal for conducting business prejudicial to the interest of the Company.

 

The erstwhile provisions of section 398(1)(b) of the 1956 Act it was enough to establish that there was a likelihood of affairs being conducted in a prejudicial manner to the interest of Company. However, the amended provisions of Act clearly lays down situatiobs where interest of the Company can be prejudicial affected.

34 242 Powers of Tribunal

 

Pursuant to the application  made to Tribunal in sub-section 241(3), the Tribunal shall record its decision stating therein specifically as to whether or not the respondent is a fit and proper person to hold the office of director or any other office connected with the conduct and management of any company

 

Tribunal on application being made by Central Government determine whether oppression/mismanagement is being conducted in the Company and record reasons whether an officer is fit and proper for managing the Company.
35 243 Consequence of termination or modification of certain agreements

 

The person who is not a fit and proper person pursuant to sub-section (4A) of section 242 shall not hold the office of a director or any other office connected with the conduct and management of the affairs of any company for a period of 5 years from the date of the said decision. Further shall not be entitled to any compensation for loss of office.

 

However, CG may, with the leave of the Tribunal, permit such person to hold any such office before the expiry of the said period of five years.

Explicit prohibition on officers in default from holding similar office for a period of 5 years. –         
37 272 Petition for winding up

 

The amendment omits reference of clause (e) of section 271(1) from sub-section (3) of section 272.

 

The Registrar shall be entitled to present a petition for winding up under section 271, except on the grounds specified in clause (a) which provides that the Company must have resolved by way of a SR that the Company would be wound up by the Tribunal.

 

Reference of clause providing that Tribunal may file a petition under 272 if it is of the opinion that it is just and equitable that company should be wound up has been done away with.

 

 

38 398 Provisions relating to filing of applications, documents, inspection etc in electronic form.

 

The term “prospectus” has been omitted from clause (f) of sub-section (1) which provides for registration of prospectus by Registrar. Seems to be a change in the terminology.

 

Analysis of Companies (Amendment) Act, 2019