First phase of commencement of Companies (Amendment) Act, 2020

-Commencement notification dated 21st December, 2020

Smriti Wadehra, Manager and Henil Shah, Assistant Manger

corplaw@vinodkothari.com

The Ministry of Corporate Affairs vide its commencement Notification dated 21st December, 2020 has notified 45 sections of the Companies (Amendment) Act, 2020 [1]which recently received the President’s assent on 28th September, 2020[2]. The sections notified by the Ministry majorly relate to re-categorization of criminal offences into civil wrongs which is in line with the Government of India’s policy to decriminalise non-compliances that are technical and procedural nature thereby promoting ease of doing business.

A brief synopsis of the amendments is detailed below:

Section No. of CAA, 2020 Section No. of CA, 2013 Pertains to Existing Provisions Amended Provisions
Shift from fine to penalty
9 56(6) Any default in transfer and transmission of Securities Fine on Company: Min Rs. 25,000 Max Rs. 5 Lakhs and

Fine on Officer of the company in default: Min- Rs.10,000 Max – Rs. 1 Lakhs.

 

The company and every officer of the company who is in default shall be liable to a penalty of Rs. 50,000.
16 86(1) Contravention of provisions relating to registration of charges Fine on Company: Min- Rs. 1 Lakh Max- Rs. 10 Lakhs

Fine on officer in default: Imprisonment for a term which may extend to 6 months or with fine Min- Rs. 25,000 Max- Rs. 1 Lakh, or with both.

Company shall be liable to a penalty of Rs. 5 Lakhs and every officer of the company who is in default shall be liable to a penalty of Rs. 50,000.
17 88(5) Failure to maintain Register of Members or debenture holders etc.

 

Fine on Company: Min- Rs. 50,000 Max- Rs. 3 Lakhs and where the failure is a continuing one, with a further fine of Rs. 1000 for every day,

 

Every officer of the company who is in default: Fine of min- Rs. 50,000 Max-Rs. 3 Lakhs where the failure is a continuing one, with a further fine of Rs. 1000 for every day.

 

Company shall be liable to a penalty of Rs. 3 Lakhs and every officer of the company who is in default shall be liable to a penalty of Rs. 50,000.
18 89(5) Failure to submit declaration in respect of beneficial Interest in any share

 

Person shall be punishable with fine which may extend to Rs. 50,000 and where the failure is a continuing one, with a further fine which may extend to Rs. 1000 for every day after the first during which the failure continues.

 

Person shall be liable to a penalty of Rs. 50,000 and in case of continuing failure, with a further penalty of Rs. 200 for each day after the first during which such failure continues, subject to a maximum of Rs. 5 Lakhs.
18 89(6) Declaration in Respect of Beneficial Interest in any Share

 

The company and every officer of the company who is in default shall be punishable with fine which shall not be less than Rs. 500 but which may extend to Rs. 1000 and where the failure is a continuing one, with a further fine which may extend to Rs. 1000 for every day after the first during which the failure continues.

 

The company and every officer of the company who is in default shall be liable to a penalty of Rs. 1000 for each day during which such failure continues, subject to a maximum of Rs. 5 Lakhs in the case of a company and Rs. 2 Lakhs in case of an officer who is in default.
19 90(10) Failure to declare significant beneficial ownership in the Company Person shall be punishable with imprisonment for a term which may extend to 1 year or with fine which shall not be less than Rs. 1 Lakh but which may extend to Rs. 10 Lakhs or with both and where the failure is a continuing one, with a further fine which may extend to Rs. 1000 for every day after the first during which the failure continues.

 

Person shall be liable to penalty of Rs. 50,000 and in case of continuing failure, with a further penalty of Rs. 1000 for each day after the first during which such failure continues, subject to a maximum of Rs. 2 Lakhs.
19 90(11) Failure to maintain register of significant beneficial owners in a company

 

Company and every officer of the company who is in default shall be punishable with fine which shall not be less than Rs. 10 Lakhs but which may extend to Rs. 50 Lakhs and where the failure is a continuing one, with a further fine which may extend to Ra. 1000 for every day after the first during which the failure continues. Company shall be liable to a penalty of Rs. 1 Lakhs and in case of continuing failure, with a further penalty of Rs. 500 for each day, after the first during which such failure continues, subject to a maximum of Rs. 5 Lakhs and every officer of the company who is in default shall be liable to a penalty of Rs. 25,000 and in case of continuing failure, with a further penalty of Rs. 200 for each day, after the first during which such failure continues, subject to a maximum of Rs.1 Lakh

 

20 92(6) Certification of Annual Return not in conformity with the section

 

Company secretary in practice shall be punishable with fine which shall not be less than Rs. 50,000 but which may extend to Rs. 5 Lakhs.

 

Company secretary in practice shall be liable to a penalty of Rs. 2 Lakhs.
21 105(5) Proxies If for the purpose of any meeting of a company, invitations to appoint as proxy a person or one of a number of persons specified in the invitations are issued at the company’s expense to any member entitled to have a notice of the meeting sent to him and to vote thereat by proxy, every officer of the company who knowingly issues the invitations as aforesaid or wilfully authorises or permits their issue

shall be punishable with fine which may extend to Rs. 1 Lakh:

Provided that an officer shall not be punishable under this sub-section by reason only of the issue to a member at his request in writing of a form of appointment naming the proxy, or of a list of persons willing to act as proxies, if the form or list is available on request in writing to every member entitled to vote at the meeting by proxy.

 

If for the purpose of any meeting of a company, invitations to appoint as proxy a person or one of a number of persons specified in the invitations are issued at the company’s expense to any member entitled to have a notice of the meeting sent to him and to vote thereat by proxy, every officer of the company who issues the invitation as aforesaid or authorises or permits their issue, shall be liable to a penalty of Rs. 50,000.

Provided that an officer shall not be liable under this sub-section by reason only of the issue to a member at his request in writing of a form of appointment naming the proxy, or of a list of persons willing to act as proxies, if the form or list is available on request in writing to every member entitled to vote at the meeting by proxy

30 143(15) Failure to report fraud under the section Any auditor, cost accountant or company secretary in practice shall be punishable with fine which shall not be less than Rs. 1 Lakh but which may extend to Rs. 25 Lakhs. Any auditor, cost accountant, or company secretary shall,

(a)    in case of a listed company, be liable to a penalty of Rs. 5 Lakhs; and

(b)    in case of any other company, be liable to a penalty of Rs. 1 Lakh

35 172 Non-compliance of any provisions of chapter relating to appointment and qualification of directors Company and every officer of the company who is in default shall be punishable with fine which shall not be less than Rs. 50,000 but which may extend to Rs. 5 Lakhs. Company and every officer of the company who is in default shall be liable to a penalty of Rs. 50,000, and in case of continuing failure, with a further penalty of Rs. 500 for each day during which such failure continues, subject to a maximum of Rs. 3 Lakhs in case of a company

 

36 178(8) Non-compliance of provisions relating to section 177 and 178 of the Act. Company shall be punishable with fine which shall not be less than Rs. 1 Lakh but which may extend to Rs. 5 Lakhs and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 1 year or with fine which shall not be less than Rs. 25,000 but which may extend to Rs. 1 Lakh, or with both.

 

Company shall be liable to a penalty of Rs. 5 Lakhs and every officer of the company who is in default shall be liable to a penalty of Rs. 1 Lakh.

 

37 184(4) Failure of disclosure of Interest by Director

 

Director shall be punishable with imprisonment for a term which may extend to 1 year or with fine which may extend to Rs. 1 Lakh, or with both. Director shall be liable to a penalty of Rs. 1 Lakh.

 

38 187(4) Failure to hold investments by the company in its own name

 

The company shall be punishable with fine which shall not be less than Rs. 25,000 but which may extend to Rs. 25 Lakhs and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 6 months or with fine which shall not be less than Rs. 25,000 but which may extend to Rs. 1 Lakh, or with both.

 

The company shall be liable to a penalty of Rs 5 Lakhs and every officer of the company who is in default shall be liable to a penalty of Rs. 50,000.
39 188(5) Related Party Transactions

 

Any director or any other employee of a company, who had entered into or authorised the contract or arrangement in violation of the provisions of this section shall-

(i) in case of listed company, be punishable with imprisonment for a term which may extend to 1 year or with fine which shall not be less than Rs. 25,000 but which may extend to Rs. 5 Lakhs, or with both; and

(ii) In case of any other company, be punishable with fine which shall not be less than Rs. 25,000 but which may extend to Rs. 5 Lakhs.

 

Any director or any other employee of a company, who had entered into or authorised the contract or arrangement in violation of the provisions of this section shall-

(i)            in case of listed company, be liable to a penalty Rs. 25 Lakhs; and

(ii)            In case of any other company, be liable to a penalty of Rs. 5 Lakhs.

41 204(4) Contravention of provisions relating to secretarial Audit for bigger companies

 

The company, every officer of the company or the company secretary in practice, who is in default, shall be punishable with fine which shall not be less than Rs. 1 Lakh but which may extend to Rs. 5 Lakhs. The company, every officer of the company or the company secretary in practice, who is in default, shall be liable to a penalty of Rs. 2 Lakhs.
42 232(8) Merger and Amalgamation of Companies

 

If a transferor company or a transferee company contravenes the provisions of the section, the transferor company or the transferee company, as the case may be, shall be punishable with fine which shall not be less than Rs. 1 Lakh but which may extend to Rs. 25 Lakhs and every officer of such transferor or transferee company who is in default, shall be punishable with imprisonment for a term which may extend to 1 year or with fine which shall not be less than Rs. 1 Lakh but which may extend to Rs. 3 Lakhs, or with both.

 

If a company fails to file the certified true copy of the order with the Registrar for registration within 30 days of the receipt of order, the company and every officer of the company who is in default shall be liable to a penalty of Rs. 20,000, and where the failure is a continuing one, with a further penalty of Rs. 1000 for each day after the first during which such failure continues, subject to a maximum of Rs. 3 Lakhs.
57 405 Failure to provide any information or statistic to CG Company shall be punishable with fine which may extend to Rs. 25,000 and every officer of the company who is in default, shall be punishable with imprisonment for a term which may extend to 6 months or with fine which shall not be less than Rs. 25, 000 but which may extend to 3 lakh rupees, or with both.

 

The company and every officer of the company who is in default shall be liable to a penalty of Rs. 25,000 and in case of continuing failure, with a further penalty of Rs. 1000 for each day after the first during which such failure continues, subject to a maximum of Rs. 3 lakh rupees.
63 450 Punishment where no specific penalty or punishment is provided Company and every officer of the company who is in default or such other person shall be punishable with fine which may extend to Rs. 10,000, and where the contravention is continuing one, with a further fine which may extend to Rs. 1000 for every day after the first during which the contravention continues. Company and every officer of the company who is in default or such other person shall be liable to a penalty of Rs. 10,000 and in case of continuing contravention, with a further penalty of Rs. 1000 foreach day after the first during which the contravention continues, subject to a maximum of Rs. 2 lakhs in case of a company and Rs. 50,000 in case of an officer who is in default or any other person.

 

Omission of imprisonment provisions
3 8(11) Failure in fulfilment in requirement relating to formation of companies with Charitable Objects, etc.

 

Directors and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 3 years or with fine which shall not be less than Rs. 25000 which may extend to Rs. 25 lakhs, or with both.

 

Provided that when it is proved that the affairs of the company were conducted fraudulently, every officer in default shall be liable for action under section 447.

 

Directors and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 3 years or with fine which shall not be less than Rs. 25000 which may extend to Rs. 25 lakhs, or with both.

 

Provided that when it is proved that the affairs of the company were conducted fraudulently, every officer in default shall be liable for action under section 447.

 

6 26(9) Issue of prospectus in contravention of provisions of section 26 of the Act Every person who is knowingly a party to the issue of such prospectus:

shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than Rs. 50,000 but which may extend to Rs. 3 Lakhs or with both.

Every person who is knowingly a party to the issue of such prospectus:

shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than Rs. 50,000  but which may extend to Rs. 3 Lakhs or with both.

 

7 40(5) Default in complying with provisions relating to securities being dealt with in Stock Exchanges

 

Every officer of the company who is in default shall be punishable:

With imprisonment for a term which may extend to one year or with fine which shall not be less than Rs. 50,000 but which may extend to Rs. 3 Lakhs, or with both.

 

Every officer of the company who is in default shall be punishable :

With imprisonment for a term which may extend to one year or with fine which shall not be less than Rs. 50,000 but which may extend to Rs. 3 Lakhs, or with both.

 

14 68(11) Non-compliance of buyback provisions Every officer of the company who is in default shall be punishable:

With imprisonment for a term which may extend to 3 years or with fine which shall not be less than Rs. 1 Lakh but which may extend to Rs. 3 Lakhs, or with both.

 

Every officer of the company who is in default shall be punishable:

With imprisonment for a term which may extend to 3 years or with fine which shall not be less than Rs. 1 Lakh but which may extend to Rs. 3 Lakhs, or with both.

 

24 128(6) Books of Account, etc., to be kept by Company

 

If the managing director, the whole-time director in charge of finance, the Chief Financial Officer or any other person of a company charged by the Board with the duty of maintenance of books of accounts of the company and contravenes such provisions, such persons of the company shall be punishable with imprisonment for a term which may extend to 1 year or with fine which shall not be less than Rs. 50,000 but which may extend to Rs. 5 Lakhs or with both.

 

If the managing director, the whole-time director in charge of finance, the Chief Financial Officer or any other person of a company charged by the Board duty of maintenance of books of accounts of the company and contravenes such provisions, such persons of the company shall be punishable with imprisonment for a term which may extend to 1 year or with fine which shall not be less than Rs. 50,000 but which may extend to Rs. 5 Lakhs or with both.

 

26 134(8) Contravention of provision relating to the Financial Statements, Board’s Report, etc of the Company Every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 3 years or with fine which shall not be less than Rs. 50,000 but which may extend to Rs. 5 Lakhs, or with both.

 

Every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 3 years shall be liable to a penalty of Rs. 50,000.

 

31 147(1) Punishment for contravention of provision relating to appointment of auditors and audit of the Company Every officer of the company who is in default shall be punishable:

with imprisonment for a term which may extend to 1 year or with fine which shall not be less than Rs. 10,000 but which may extend to Rs. 1 Lakh, or with both.

 

Every officer of the company who is in default shall be punishable:

with imprisonment for a term which may extend to 1 year or with fine which shall not be less than Rs. 10,000 but which may extend to Rs. 1 Lakh, or with both.

 

34 167(2) Continuation of office by director after knowing his disqualifications Director shall be punishable with imprisonment for a term which may extend to 1 year or with fine which shall not be less than Rs. 1 Lakh but which may extend to Rs. 5 Lakhs, or with both

 

Director shall be punishable with imprisonment for a term which may extend to 1 year or with fine which shall not be less than Rs. 1 Lakh but which may extend to Rs. 5 Lakhs, or with both

 

43 242(8) Failure to comply with alteration in the charter documents by the Tribunal Every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 6 months or with fine which shall not be less than Rs. 25,000 but which may extend to Rs. 1 Lakh, or with both.

 

Every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 6 months or with fine which shall not be less than Rs. 25,000 but which may extend to Rs. 1 Lakh, or with both.

 

44 243(2) Person who knowingly acts as MD or other director in the company while entering into agreements Such person shall be punishable with imprisonment for a term which may extend to 6 months or with fine which may extend to Rs. 5 Lakhs, or with both.

 

Such person shall be punishable with imprisonment for a term which may extend to 6 months or with fine which may extend to Rs. 5 Lakhs, or with both.

 

49 347(4) Disposal of Books and Papers of Company.

 

If any person acts in contravention of any rule framed or an order made under sub-section (3), he shall be punishable with imprisonment for a term which may extend to 6 months or with fine which may extend to Rs. 50,000, or with both.

 

If any person acts in contravention of any rule framed or an order made under sub-section (3), he shall be punishable with imprisonment for a term which may extend to 6 months or with fine which may extend to Rs. 50,000, or with both.

 

54 392 Punishment for contravention of provisions of Chapter XXII relating to companies incorporated outside India The foreign company shall be punishable with fine which shall not be less than Rs. 1 lakh but which may extend to Rs. 3 lakh and in the case of a continuing offence, with an additional fine which may extend to Rs. 50, 000 for every day after the first during which the contravention continues and every officer of the foreign company who is in default shall be punishable with imprisonment for a term which may extend to 6 months or with fine which shall not be less than Rs. 25,000 but which may extend to Rs. 5 lakhs, or with both The foreign company shall be punishable with fine which shall not be less than Rs. 1 lakh but which may extend to Rs. 3 lakhs and in the case of a continuing offence, with an additional fine which may extend to Rs. 50, 000 for every day after the first during which the contravention continues and every officer of the foreign company who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than Rs. 25,000 but which may extend to Rs. 5 lakhs, or with both
61 441 Compounding of certain offence Any officer or other employee of the company who fails to comply with any order made by the Tribunal or the Regional Director or any officer authorised by the Central Government under sub-section (4) shall be punishable with imprisonment for a term which may extend to 6 months, or with fine not exceeding Rs. 1 lakh, or with both If any officer or other employee of the company who fails to comply with any order made by the Tribunal or the Regional Director or any officer authorised by the Central Government under sub-section (4), the maximum amount of fine for the offence proposed to be compounded under this section shall be twice the amount provided in the corresponding section in which punishment for such offence is provided.

 

Amendment in penal provisions
20 92(5) Failure to file Annual Return within the specified time Company and its every officer who is in default shall be liable to a penalty of Rs. 50,000 and in case of continuing failure, with further penalty of Rs. 100 for each day during which such failure continues, subject to a maximum of Rs. 5 Lakhs. Company and its every officer who is in default shall be liable to a penalty of Rs. 10,000 and in case of continuing failure, with further penalty of Rs. 100 for each day during which such failure continues, subject to a maximum of Rs. 2 Lakhs in case of a company and Rs. 50,000 in case of an officer who is in default.
22 117(2) Failure to file resolution or agreement with the Registrar Penalty on Company: Rs. 1 Lakh and in case of continuing failure, with further penalty of Rs. 500 for each day after the first during which such failure continues, subject to a maximum of Rs. 25 Lakhs.

Every officer of the company who is in default including liquidator of the company, if any, shall be liable to a penalty of Rs. 50,000 and in case of continuing failure, with further penalty of Rs. 500 for each day after the first during which such failure continues, subject to a maximum of Rs. 5 Lakhs.

Penalty on Company: Rs. 10,000 and in case of continuing failure, with further penalty of Rs. 100 for each day after the first during which such failure continues, subject to a maximum of Rs. 2 Lakhs.

Every officer of the company who is in default including liquidator of the company, if any, shall be liable to a penalty of Rs. 10,000 and in case of continuing failure, with further penalty of Rs. 100 for each day after the first during which such failure continues, subject to a maximum of Rs. 50,000.

28 137(3) Failure to file a copy of Financial Statement to be Filed with Registrar

 

Company shall be liable to a penalty of Rs. 1000 for every day during which the failure continues but which shall not be more than Rs. 10 Lakhs, and the MD and the CFO of the company, if any, and, in the absence, any other director who is charged by the Board with the responsibility of complying with the provisions of this section, and, in the absence of any such director, all the directors of the company, shall be liable to a penalty of Rs. 1 Lakh and in case of continuing failure, with further penalty of Rs. 100 for each day after the first during which such failure continues, subject to a maximum of Rs. 5 Lakhs. Company shall be liable to a penalty of Rs. 10,000 and in case of continuing failure, with a further penalty of Rs. 100 for each day during which such failure continues, subject to a maximum of Rs. 2 Lakhs, and the MD and the CFO of the company, if any, and, in the absence any other director who is charged by the Board with the responsibility of complying with the provisions of this section, and, in the absence of any such director, all the directors of the company, shall be liable to a penalty of Rs. 10,000 and in case of continuing failure, with further penalty of Rs. 100 for each day after the first during which such failure continues, subject to a maximum of Rs. 50,000.
29 140(3) Failure to file resignation with the company and Registrar The auditor shall be liable to a penalty of Rs. 50,000 or an amount equal to the remuneration of the auditor, whichever is less, and in case of continuing failure, with further penalty of Rs. 500 for each day after the first during which such failure continues, subject to a maximum of Rs. 5 Lakhs. The auditor shall be liable to a penalty of Rs. 50,000 or an amount equal to the remuneration of the auditor, whichever is less, and in case of continuing failure, with further penalty of Rs. 500 for each day after the first during which such failure continues, subject to a maximum of Rs. 2 Lakhs.
33 165(6) Failure to comply with restriction on maximum number of Directorships

 

Person shall be liable to a penalty of Rs. 5000 for each day after the first during which such contravention continues. Person shall be liable to a penalty of Rs. 2000 for each day after the first during which such violation continues, subject to a maximum of Rs. 2 Lakhs.
50 348(6) Information as to pending liquidations If a Company Liquidator contravenes the provisions of this section, the Company Liquidator shall be punishable with fine which may extend to five thousand rupees for every day during which the failure continues.

 

Where a Company Liquidator, who is an insolvency professional registered under the Insolvency and Bankruptcy Code, 2016 is in default in complying with the provisions of this section, then such default shall be deemed to be a contravention of the provisions of the said Code, and the rules and regulations made thereunder for the purposes of proceedings under Chapter VI of Part IV of that Code.

 

Omission of penal provisions
8 48(5) Failure to protect rights of the members during variation of Shareholders’ Rights Fine on Company: Which shall not be less than Rs. 25,000 but which may extend to Rs. 5 Lakhs and

Every officer of the company who is in default shall be punishable: with imprisonment for a term which may extend to 6 months or with fine which shall not be less than Rs. 25,000 but which may extend to Rs. 5 Lakhs, or with both.

Omitted
10 59(5) Default in complying with order of Tribunal w.r.t. rectification of register of members Fine on Company: Which shall not be less than Rs. 1 Lakh but which may extend to Rs. 5 Lakhs and

Every officer of the company who is in default shall be punishable: With imprisonment for a term which may extend to 1 year or with fine which shall not be less than Rs. 1 Lakh but which may extend to Rs. 3 Lakhs, or with both.

Omitted
13 66(11) Failure to publish the order of reduction of capital of the Company Fine on Company: not be less than Rs. 5 Lakhs but which may extend to Rs. 25 Lakhs

 

Omitted
15 71(11) Failure to comply with order of Tribunal for discharge of assets of the Company Every officer of the company who is in default shall be punishable: With imprisonment for a term which may extend to 3 years or with fine which shall not be less than Rs. 2 Lakhs but which may extend to Rs. 5 Lakhs, or with both. Omitted
46 284(2) Promoters, directors etc. to cooperate with Company Liquidator Where any person, without reasonable cause, fails to discharge his obligations under sub-section (1), he shall be punishable with imprisonment which may extend to six months or with fine which may extend to fifty thousand rupees, or with both

 

If any person required to assist or cooperate with the Company Liquidator under sub-section (1) does not assist or cooperate, the Company Liquidator may make an application to the Tribunal for necessary directions.

 

On receiving an application under sub-section (2), the Tribunal shall, by an order, direct the person required to assist or cooperate with the Company Liquidator to comply with the instructions of the Company Liquidator and to cooperate with him in discharging his functions and duties

47 302(4) Dissolution of company by Tribunal If the Company Liquidator makes a default in forwarding a copy of the order within the period specified in sub-section (3), the Company Liquidator shall be punishable with fine which may extend to five thousand rupees for every day during which the default continues.

 

Omitted
48 342(6) Prosecution of Delinquent Officers and Members of Company

 

If a person fails or neglects to give assistance required by sub-section (5), he shall be liable to pay fine which shall not be less than Rs. 25,000 but which may extend to Rs. 1 Lakh.

 

 
50 348(7) Information as to Pending Liquidations.

 

If a Company Liquidator makes wilful default in causing the statement referred to in sub-section (1) audited by a person who is not qualified to act as an auditor of the company, the Company Liquidator shall be punishable with imprisonment for a term which may extend to 6 months or with fine which may extend to Rs. 1 Lakh, or with both. Omitted
Amendments relating to dissolution of company
47 302(3) Dissolution of company by tribunal A copy of the order shall, within thirty days from the date thereof, be forwarded by the Company Liquidator to the Registrar who shall record in the register relating to the company a minute of the dissolution of the company

 

The Tribunal shall, within a period of thirty days from the date of the order—

(a) forward a copy of the order to the Registrar who shall record in the register relating to the company a minute of the dissolution of the company; and

(b) direct the Company Liquidator to forward a copy of the order to the Registrar who shall record in the register relating to the company a minute of the dissolution of the company.

 

51 356 Powers of Tribunal to declare dissolution of company void It shall be the duty of the Company Liquidator or the person on whose application the order was made, within thirty days after the making of the order or such further time as the Tribunal may allow, to file a certified copy of the order with the Registrar who shall register the same, and if the Company Liquidator or the person fails so to do, the Company Liquidator or the person shall be punishable with fine which may extend to ten thousand rupees for every day during which the default continues.

 

The Tribunal shall—

(a) forward a copy of the order, within thirty days from the date thereof, to the Registrar who shall record the same; and (b) direct the Company Liquidator or the person on whose application the order was made, to file a certified copy of the order, within thirty days from the date thereof or such further period as allowed by the Tribunal, with the Registrar who shall record the same

 

[1] https://www.mca.gov.in/Ministry/pdf/AmendmentAct_29092020.pdf

[2] http://egazette.nic.in/WriteReadData/2020/223873.pdf

 

Our other write ups covering Companies (Amendment) Act, 2020:

  1. Highlights of Companies (Amendment) Bill, 2020: http://vinodkothari.com/2020/03/highlights-of-the-companies-amendment-bill-2020/
  2. Companies (Amendment) Act, 2020 PowerPoint presentation: http://vinodkothari.com/2020/09/companies-amendment-act-2020/
  3. Enforcement Status of Companies (Amendment) Act, 2020:http://vinodkothari.com/2020/12/enforcement-status-of-companies-amendment-act-2020/

Enforcement Status of Companies (Amendment) Act, 2020

 

Important Links:

  1. The Companies (Amendment) Act, 2020 : https://www.mca.gov.in/Ministry/pdf/AmendmentAct_29092020.pdf
  2. MCA notification dated December 21, 2020: https://www.mca.gov.in/Ministry/pdf/AmendmentAct_29092020.pdf
  3. Our other write ups covering Companies (Amendment) Act, 2020:
    1. Highlights of Companies (Amendment) Bill, 2020: http://vinodkothari.com/2020/03/highlights-of-the-companies-amendment-bill-2020/
    2. Companies (Amendment) Act, 2020 PowerPoint presentation: http://vinodkothari.com/2020/09/companies-amendment-act-2020/

MCA issues rules to squeeze out minority shareholding held in dematerialized form

Shaifali Sharma | Vinod Kothari and Company

corplaw@vinodkothari.com

 

Understanding minority squeeze out

‘Minority squeeze out’ demonstrates the power of majority shareholders to forcibly acquire shares from minority shareholders and drive them out to gain absolute control over the company.

Section 236 of the Companies Act, 2013 (‘Act, 2013’) sets out a process of squeezing out minority shareholder whereby any shareholder of the company, either alone or along with person acting in concert, holding 90% or more of the total issued equity share capital, may acquire the remaining equity shares of the company by giving an offer to the minority shareholders. This “Rule of Majority” principle was recognized in a landmark case Foss v. Harbottle, where it was held that that the minority shareholders are bound by the decision of the majority shareholders and the Courts do not interfere in the internal matters of the Company. However, the powers of majority should be exercised in reasonable manner which do not result into oppression of minority. Thus, the inherent protection under the law is that the acquisition shall take place at a fair value or higher value as determined by the valuer in accordance with Rule 27 of the (Compromise, Arrangements and Amalgamation) Rules, 2016 (‘CAA Rules, 2016’).

The section 236 was incorporated under the Act, 2013 on the recommendation of the Dr. J.J. Irani Committee Report on Company Law, 2005[1] for the reason reproduced below:

“The law should enable companies to purchase the stake of minority shareholders in order to prevent exploitation of such shareholders where a promoter has bought back more than 90% of the equity. Such purchase should, however, on the basis of a fair offer. Appropriate valuation rules for this purpose should be prescribed, or, the last known price prior to delisting, could be made the benchmark for such acquisitions.”

The purpose is to ensure a seamless takeover of a company, since in view of very smallholding of the minority shareholders; the minority shareholders neither will be able to participate in the management of the company nor will be able to seek redressal of their rights or have a meaningful participation in the company’s working. Therefore, to provide fair exit to the minority shareholders and to allow majority shareholders to exercise full control over the company, section 236 has been inserted under the Act, 2013.

This write-up endeavours to analyse (1) the existing process of acquiring minority shares held in physical form, (2) the practical difficulties for acquiring minority shares held in demat form and (3) the new rules introduced vide MCA notification[2] dated 17.12.2020 setting out the procedure of transferring minority shares held in demat form.

Modus Operandi of purchase of minority shareholding held in physical form

  1. Intimation to the Company

The acquirer holding 90% of the issued equity share capital of a company to inform the company of its intention to oust the minority shareholders in accordance with provisions of Section 236 of Act, 2013. At the same time, the minority shareholders can also offer their shares to be acquired to the acquirer in compliance prescribed provisions.

  1. Determining the fair value of shares for acquisition

Fair value of the shares of the Company whose shares are being transferred in accordance with Rule 27 (Compromise, Arrangements and Amalgamation) Rules, 2016.

Fair value of the shares of the company to be offered to the minority shareholders shall be calculated by a registered valuer in accordance with Rule 27 of the CAA Rules, 2016 which provides for evaluation criteria for listed companies as well as unlisted companies.

  1. Transfer Agent

The company whose shares are being transferred to the acquirer, shall act as a transfer agent for receiving and paying the price to the minority shareholders and for taking delivery of the shares and delivering such shares to the majority.

  1. Depositing of amount in separate account operated by the Company

 The majority shareholders are required to deposit an amount equal to the value of shares to be acquired by them, in a separate bank account to be operated by the company for payment to the minority shareholders, for atleast 1 year for payment to the minority shareholders and such amount shall be disbursed to the entitled shareholders within sixty days and even thereafter by the company.

  1. Despatch of offer letter and consideration by the company

The offer letter received from the acquirer will be dispatched to the shareholders along with the consideration.

  1. Physical delivery of shares

Minority shareholders shall on receipt of offer letter, provide for physical delivery of their shares to the company within the offer period.

The point of relevance is that, the word used is “physical delivery of shares” and not physical share certificates. Accordingly, physical delivery would cover delivery of both, shares held in physical form as well as shares held in dematerialized form by minority shareholders.

  1. In case of shares held in physical form, physical delivery will be evidenced by receipt of share certificates by the Company;
  2. In case of shares held in dematerialized form, physical delivery will be evidenced by the receipt of Delivery Instruction Slips (DIS) in favor of the acquirer. Upon submission of DIS, the Depository Participant processes the DIS and debits the clients account with the said number of shares. Simultaneously, the target demat account is credited with the same number of shares.

7. Failure to tender physical delivery of shares

In the absence of a physical delivery of shares by the shareholders within the time specified by the company, such shares shall be taken as cancelled and the transferor company shall be authorized to issue shares in lieu of the cancelled shares and complete the transfer by following the applicable transfer provision and dispatching the amount paid by the acquirer in advance.

Impracticability to acquire minority shareholding held in dematerialized form

In order to ensure smooth implementation of acquisition of minority shareholding, the Act, 2013 empowers the company whose shares are being transferred to issue new shares in lieu of the undelivered shares within the time specified.

While in case of shares held in physical form, section 236(6) of the Act, 2013 is clear to state that share certificates shall deemed to be cancelled for non-receipt of physical delivery of shares and the company is authorized to issue new shares in lieu of cancelled share certificates, however, there is a difficulty in implementing the same in case of shares held in dematerialized form.

The law is silent on the procedure to be followed by the company for transferring the shares held by minority shareholders in dematerialized form, in the absence of receipt of DIS from minority shareholders. The Depositories, without any clear instructions from Ministry of Corporate Affairs (‘MCA’) or Securities Exchange Board of India (‘SEBI’), does not permit transfer of shares to the demat account of acquirer by virtue of DIS signed by the company on behalf of the minority shareholder.

Therefore, the intent of the law behind the enforcement of section 236 remains unfulfilled in case of shares held in dematerialized form as the company would not be able to give effect to the transfer in the absence of any definitive procedure laid out to give effect to the same.

MCA new rules on purchase of minority shareholding held in dematerialized form

MCA has finally woken up to the need to enable companies to purchase minority shareholding held in demat form. The CAA Rules, 2016 has been amended vide MCA notification dated 17.12.2020 where a new Rule 26A has been introduced to provide process for purchase of minority shareholding held in demat form. The detailed step-by-step process highlighting the actionable for transferor company is explained below:

  1. Company to verify the details of minority shareholders holding shares in dematerialized form

The company shall within 2 weeks from the date of receipt of the amount equal to the price of shares to be acquired by the acquirer, verify the details of the minority shareholders holding shares in dematerialised form.

  1. Company to send notice to minority shareholders informing cut-off date

The company shall send notice to minority shareholders by registered post or by speed post or by courier or by email informing about a cut-off date on which the shares of minority shareholders shall be debited from their account and credited to the designated demat account of the company, unless the shares are credited in the account of the acquirer, as specified in such notice, before the cut-off date.

The cut-off date shall not be earlier than 1 month after the date of sending of the said notice. Also, if the cut-off date falls on a holiday, the next working day shall be deemed to be the cut-off date.

  1. Newspaper publication of notice served to minority shareholders

A copy of the notice served to the minority shareholders shall also be published simultaneously in two widely circulated newspapers (one in English and one in vernacular language) in the district in which the registered office of the company is situated and also be uploaded on the website of the company, if any.

  1. Company to inform depository about the cut-off date along with a list of declarations

Immediately after newspaper publication of notice, the company shall inform the depository w.r.t cut-off date and submit the following declarations stating that:

  1. The corporate action is being effected in pursuance of the provisions of section 236 of the Act;
  2. the minority shareholders whose shares are held in dematerialised form have been informed about the corporate action [a copy of the notice served to such shareholders and published in the newspapers to be attached];
  3. the minority shareholders shall be paid by the company immediately after completion of corporate action;
  4. any dispute or complaints arising out of such corporate action shall be the sole responsibility of the company.

For the purposes of effecting transfer of shares through corporate action, the Board of Directors of the company shall authorise the Company Secretary, or in his absence any other person, to inform the depository and to submit the documents as may be required.

  1. Depository to transfer the minority shares to company on the cut-off date

Except for the shares already credited in the account of the acquirer before the cut-off date by shareholders, the depository shall transfer of shares of the minority shareholders into the designated demat account of the company on the cut-off date and intimate the company.

Note: In case a specific order of Court or Tribunal, or statutory authority restraining any transfer of such shares and payment of dividend, or where such shares are pledged or hypothecated under the provisions of the Depositories Act, 1996, the depository shall not transfer the shares of the minority shareholders to the designated demat account of the company.

  1. Company to make payment to minority shareholders

The company shall immediately upon transfer of shares by the depository, disburse the price of the shares so transferred, to each of the minority shareholders after deducting the applicable stamp duty, which shall be paid by the company, on behalf of the minority shareholders, in accordance with the provisions of the Indian Stamp Act, 1899.

  1. Depository to transfer the minority shares from company’s demat account to acquirer’s demat account

One the payment is successfully disbursed to minority shareholders, the company shall inform the depository to transfer the shares of such shareholders, kept in the designated demat account of the company, to the demat account of the acquirer.

Note: The company shall continue to disburse payment to the entitled shareholders, where disbursement could not be made within the specified time, and transfer the shares to the demat account of acquirer after such disbursement.

A pictorial presentation giving step-by-step procedure to the above requirements is summarized below:

Concluding Remarks

The majority shareholders enjoy the right to squeeze out minority shareholders to gain control over the company in toto and attain a greater flexibility in decision making. While the process of acquisition of minority shares held in physical form is clearly established in the Act, 2013, however, companies were facing it practically difficult to implement in case minority shares are held in demat form. In the absence of any clear guidelines, squeezing out minority shareholders turned out as a challenge to implement.

The new rules notified by MCA are certainly a laudable solution facilitating the majority shareholders to smoothly acquire the shares held by minority shareholders in demat form.

 

 

Other reading materials on the similar topic:

  1. ‘Comparative Analysis of provisions enabling majority shareholders to squeeze out minorities’ can be viewed here
  2. ‘Minority Squeeze Out: A strong new provision under section 236 of the Companies Act, 2013’ can be viewed here
  3. ‘Takeover under Companies Act, 2013’ can be viewed here
  4. Presentation on ‘Minority-outs under Companies Act, 2013’ can be viewed here

Our Youtube Channel: https://www.youtube.com/channel/UCgzB-ZviIMcuA_1uv6jATbg

 

 

[1] H-ttp://www.nfcg.in/pdf/23-Irani%20committee%20report%20of%20the%20expert%20committee%20on%20Company%20law,2005.pdf

[2] http://egazette.nic.in/WriteReadData/2020/223774.pdf

SEBI proposes liberal provisions for promoter reclassification

Shaivi Bhamaria | Vinod Kothari and Company

corplaw@vinodkothari.com

Introduction

Reg. 31A of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘LODR Regulations’) lays down conditions pursuant to which promoters/ person belonging to promoter group of a listed entity can be reclassified as public shareholders. Reg. 31A (5) provides that if a public shareholder seeks to re-classify itself as promoter, it will have to make an open offer as per the provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

SEBI on November 23, 2020 has issued a Consultation Paper on Re-Classification of Promoter/ Promoter Group Entities and Disclosure of the Promoter Group Entities in the Shareholding Pattern[1] (‘Consultation Paper’) for public comments. At present SEBI has been granting relaxations from the requirements under reg. 31A of the LODR regulations on a case to case basis to promoters who have found reclassification difficult under current regulatory regime.  The said Paper has been issued on the basis of the recommendations of the Primary Market Advisory Committee (‘PMAC’) of SEBI in order to regularise the provisions relating to reclassification and minimise the need for providing relaxation on case-to-case basis.

Current Framework:

A summary of the present reclassification process is laid down below:

  1. The promoters/person belonging to promoter group seeking reclassification as public shareholders must satisfy the conditions laid down in reg. 31A (3) (b) of the LODR regulations;
  2. The listed entity must be in compliance with the conditions laid down in reg. 31A (3) (c) of LODR regulations;
  3. Promoters/person belonging to promoter group must make a request for re-classification to the board of directors of the listed entity. The request must contain the rationale for seeking re-classification and also a statement on how the conditions specified in reg. 31A (3) (b) are satisfied;
  4. The board after analysing the request must place the same along with its views, for approval of the shareholders in a general meeting. There should be a time gap of at least three months but not exceeding six months between the date of board meeting and the shareholder’s meeting;
  5. The request for re-classification should be approved in the general meeting by an ordinary resolution in which the promoter/ persons belonging to promoter group seeking re-classification cannot not vote to approve such re-classification request;
  6. Not later than 30 days from the date of approval by shareholders in general meeting, an application along with all relevant documents for re-classification must be made to the stock exchanges where the entity is listed. In case the entity is listed on more than one stock exchange, the concerned stock exchanges will jointly decide on the application.

Examples of case-to-case relaxation provided by SEBI

  1. Exemption from obtaining shareholders’ approval

In the informal guidance given to Alembic Pharmaceuticals Limited[2] SEBI had exempted the company from obtaining approval of shareholder for reclassification of 5 promoters as public shareholders inter-alia on the grounds that:

  1. The promoters cumulatively held 1.45% of the equity share capital of the company.
  2. They were senior citizens, leading independent lives and were not directly or indirectly connected with any activity of the company.
  3. They did not exercise any direct or indirect control over the affairs of the company, had never at any time held any position of key managerial personnel in the company.
  4. They did not had any special rights through formal or informal arrangements with the company or any promoter/person of the promoter group.
  5. They undertook that they would never be privy to any price sensitive information of the company

Further, in the informal guidance given to Gujarat Ambuja Exports Limited[3], SEBI had exempted the company from obtaining approval of shareholder for reclassification of one its promoters on the grounds that:

  1. the shareholding of the promoter was insignificant, constituting only 0.23% of the total paid up equity;
  2. Though being the son of a promoter, the said person was neither involved in the operations of the company nor was connected with the company.
  3. He did not exercise any direct or indirect control over the affairs of the company, did not have veto rights or special rights as to voting or control nor has any special information rights.
  4. Further the company had not entered into any shareholder agreement with him and he would never be privy to any price sensitive information of the company.

It is pertinent to note that SEBI in its interpretative letter had stated that the company would not be required to take shareholders’ approval, subject to compliance with the provisions of reg. 31A of LODR regulations. Reg, 31A of LODR regulations provide for shareholders’ approval, hence it was not very clear whether exemption from obtaining shareholders’ approval was granted or not.

Proposed amendments

1.      Relaxing the threshold of maximum voting rights allowed to be exercised by an outgoing promoter

At present reg. 31A (3) (b) (i) of LODR regulations provide that promoter/ persons belonging to promoter group seeking re-classification should not together hold more than 10% of the total voting rights in the listed entity.

The Consultation Paper proposes to increase the threshold of 10% to 15%, to enable those promoters who have shareholding of less than 15% but are no longer involved in the day-to-day control of the listed entity to opt-out from being classified as promoters, without having to reduce their share-holding.

2.      Suggestions for speeding up the process:

a.      Time limit within to place the reclassification request to be placed before the board

At present reg. 31A of LODR Regulations is silent on the time period within which the listed entity must place the reclassification request received from the promoter/ persons belonging to promoter group before the board, consequently as per SEBI’s data, in certain cases reclassification requests from promoter/ persons belonging to promoter group have not been placed before the Board, thereby ceasing the process in its initial phase.

To prevent this and streamline the process of reclassification, SEBI has proposed insertion of a time limit of one month receiving the reclassification request, within which the listed entity must place the same before its board of directors.

b.      Reduction in time period between board and shareholders meeting

As mentioned above, reg. 31A (3) (a) (ii) provides that the time gap between the meeting of the board at which the proposal for reclassification was accepted and the meeting of the shareholders, seeking approval for the same should be at least 3 months. The rationale behind the same was to give adequate time to the shareholders for considering the request of the promoter.

However, time gap 3 months resulted in an increase in the total time taken in the process. In order to increase both cost and time efficiency, the Consultation Paper proposes to reduce the minimum time gap from 3 months to 1 month.

3.      Extending the ambit of exemption from the procedure

a.      In case of reclassification is pursuant to an order/ direction of Government/ regulator

At present reg.  31A (9) provides exemption from the provisions of reg. 31A (3), (4) and (8)(a), (b) of LODR regulations in cases where re-classification of promoter/ persons belonging to promoter group is as per the resolution plan approved under s. 31 of the IBC, subject to the condition that the promoter seeking re-classification do not remain in control of the listed entity.

It is proposed to extend the said exemption to re-classification pursuant to an order/ direction of the Government/ regulator and/or as a consequence of operation of law since the re-classification is a natural consequence of the order/direction of the Government/ regulator.

b.      In case of reclassification of existing promoter pursuant to open offer

It is proposed to extend the exemption from procedure for re-classification to cases where the re-classification is pursuant to an open offer made in accordance with the provisions of SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 (‘SAST regulations’), subject to the satisfaction of following conditions:

  1. The intent of the existing promoters to re-classify has been disclosed in the letter of offer
  2. The promoter/ persons belonging to promoter group being reclassified fulfil the conditions mentioned in reg. 31A(3)(b) and the listed entity fulfils the conditions stipulated at reg. 31A(3)(c) of LODR regulations.

The rationale behind the exemption being that in cases where intent of reclassification has already been mentioned in the Letter of Offer, the requirement of promoter making an application is a mere procedural formality since the fact of re-classification is already present in the public domain.

c.       Cases where the outgoing promoter is absconding / non-cooperating

Exemption from the procedure for re-classification, is also proposed to be granted in cases where, pursuant to an open offer, a listed entity intends to re-classify erstwhile promoter/ persons belonging to promoter group but the promoter/ persons belonging to promoter group are not traceable or are not co-operative, but the same can be done after the fulfillment of the following conditions:

  1. The listed entity should demonstrate that efforts have been taken to contact the promoters through issuance of notices in newspapers, stock Exchange websites etc.
  2. Such promoters seeking re-classification should not remain in control of the listed entity

4.      Disclosure of names of promoter group entities in the shareholding pattern

Reg. 31 of LODR Regulations mandates that all entities falling under promoter/ promoter group are to be disclosed separately in the shareholding pattern.

As a matter of practice, several companies do not disclose names of persons in promoter/ promoter group who do not hold any shares.

It is to be noted that pursuant to the SEBI (Listing Obligations and Disclosures Requirements) (Sixth Amendment) Regulations, 2018[4] SEBI had, by virtue of by insertion of reg. 31(4) required that all entities falling under promoter and promoter group be disclosed separately in the shareholding pattern of listed entities appearing on the website of the stock exchanges in accordance with the formats specified by the SEBI . However, since the provisions of the Regulations still did not explicitly require entities to disclose the entire list of promoter/ promoter group irrespective of their shareholding, companies continued the practice of disclosing only those promoter/ promoter group entities that held shares in the company.  A detailed write-up on this insertion in Reg 31(4) can be read here.

To fill this gap, it has been proposed that all entities falling under promoter and promoter group be disclosed separately even if they do not hold shares in entity. Further it is proposed that listed entities obtain a declaration on a quarterly basis, from their promoters on the entities/ persons that form part of the ‘promoter group’.

Disclosures of all entities falling under promoter/ promoter group irrespective of the fact whether they hold shares in the listed entity hold all the more importance in light of the recent SEBI circular on Automation of Continual Disclosures under reg. 7(2) of SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘PIT regulations’). In order to facilitate System Driven Disclosures (‘SDD’)[5]  pursuant to the said circular, the listed entities are  required to disclose to the designated depository the PAN number/ Demat account number (for PAN exempt entities) of all Promoters and promoter group so that the system can capture any trade in securities made by such entities.

Conclusion

Exemptions provided in the consultation paper in cases of open offer and order/ direction of Government/ regulator lead to reduction in compliance burden on the listed entity, further the proposed amendments w.r.t reduction in time gap between the board meeting and general meeting and the setting of time limit for placing the application before the board will lead to streamlining the entire process and bring efficiency in the same.

The clarification w.r.t to disclosure of names of promoter group entities holding ‘Nil’ shareholding and obtaining quarterly declarations from promoter may add to the compliance burden of listed entities at once, but in our view, should be effective in the long run.

Specific comments/suggestions on the Consultation Paper can be made to SEBI on or before December 24, 2020.

 

[1] For full text of the consultation paper see:

https://www.sebi.gov.in/web/?file=https://www.sebi.gov.in/sebi_data/attachdocs/nov-2020/1606126221923.pdf#page=4&zoom=page-width,-15,71

[2] For full text of the informal guidance see:

https://www.sebi.gov.in/sebi_data/commondocs/Alembic-sebiletter_p.pdf

[3] For full text of the informal guidance see:

https://www.sebi.gov.in/sebi_data/commondocs/oct-2017/gujaratsebi_p.pdf

[4] See: https://www.sebi.gov.in/legal/regulations/nov-2018/securities-and-exchange-board-of-india-listing-obligations-and-disclosure-requirements-sixth-amendment-regulations-2018_41051.html

[5] Circular no. SEBI/HO/ISD/ISD/CIR/P/2020/168 dated September 09, 2020 available at:

https://www.sebi.gov.in/web/?file=https://www.sebi.gov.in/sebi_data/attachdocs/sep-2020/1599654391917.pdf#page=1&zoom=page-width,-16,559

Benevolent move of SEBI for a more democratic shareholder participation

-Effectiveness however doubtful!

Abhishek Saraf | Vinod Kothari and Company

corplaw@vinodkothari.com

Background

SEBI observed that under the current remote e-voting framework, the participation of the public non institutional shareholders/ retail shareholders (shareholders) is at negligible level. One of the reasons behind such low participation may be due to reluctance of the shareholders to register with multiple e-voting service providers (ESPs) which provide the e-voting facility to the listed entities. Shareholders may be finding it a tedious task to register with multiple ESPs for casting their vote and maintain multiple user IDs and passwords for the said purpose.

In view of the same and with the intent to increase the optimum utilization of the remote e-voting process by shareholders, SEBI came out with consultative paper[1] on 5th March 2020 to review the e-voting mechanism as provided by various ESPs.

Based on the public comments on consultative paper, SEBI vide its circular[2] dated 09th December 2020 decided to enable the facility of a singly log in credential for the purpose of e-voting for all demat account holders.

This article covers the circular along with our analysis on the probable impact which SEBI intends to achieve by way of easing and at the same time securing the remote-e-voting process for shareholders.

Existing Mechanism

The existing mechanism requires shareholders to register themselves with ESPs and have a separate login credential for each ESP to be able to cast their vote on resolutions proposed to be passed at the general meetings. The same can be explained better with the help of the following example:

Suppose a shareholder Mr. S holds shares in 3 companies and these companies appoint different ESPs for providing remote e-voting facility to vote on the resolutions proposed to be passed at their respective general meeting.

Now the shareholder shall register himself with all the 3 ESPs and have a separate login credential for each ESP to be able to cast his vote. Under the given situation, the shareholder may find it tedious and therefore, skip the whole process itself.  The notice calling the general meeting contains the instruction for logging in the portal of the Depository in the following manner:

SEBI’s move to increase remote-e-voting

With an intent to address the issue of negligible voting by the shareholders, SEBI has introduced a mechanism to make e-voting process more secure, convenient and simple for shareholders under which the shareholder will be allowed to cast their vote directly through their demat accounts/ Depositories/ Depositories Participants without having to go through the hassle of registering with various ESPs and maintaining a list of multiple user IDs and passwords. In the process, only a single login credential will be enough for the shareholders to participate in remote e-voting and register their vote in respect of any item.

The existing process as envisaged above will be replaced with a single doorstep which will be accessed by a single login credential under which the shareholder shall be allowed to vote without any further authentication by ESPs.

By taking the help of the above example, the new facility can be explained in the following manner-

Under the new facility, Mr. S does will not have to maintain login credentials for all the 3 ESPs but only have to register with the Depository either directly or through his demat accounts with Depsoitory Participants to have access to all the ESPs through a single log in without additional authentication with ESPs. This has been explained in detail below.

The facility shall be implemented in 2 phases.

Under Phase -1:

SEBI has instructed to implement the process as provided in Phase-1 within 6 months of the date of the circular (i.e. within 9th June 2021).

Shareholders with demat accounts have been provided the option to either directly register with Depositories to access the e-voting page of various ESPs through websites of the Depositories or accessing various ESP portals directly from their demat accounts, through the facility provided by the depository without any further authentication by ESPs, for participation in the e-voting process.

Under Phase-2:

SEBI has instructed to implement Phase 2 within 12 months from the completion of the process in Phase 1.

Under the 2nd phase, it has been proposed to further enhance the convenience and security of the system with the help of One Time Password (OTP) verification mechanism wherein the shareholders will be allowed to login through registered mobile number or E-mail based OTP verification as an alternate in place of logging through username and password for cases where shareholders have directly registered with the Depository

Further for logging in through demat account with the DPs, a second factor authentication using mobile or e-mail based OTP shall also be introduced after logging in.

While the SEBI circular requires implementation in two phases, the consultative paper was different on the following fronts:-

  • Consultative paper did not provide for implementation of the mechanism in a phased manner;
  • It was proposed that only the Depositories will be required to establish a dedicated helpline unlike the SEBI circular where both Depositories and ESPs are required to have a dedicated helpline;
  • The consultative paper proposed that the ESPs shall send details of the votes cast, to the shareholders, via SMS/ Email whereas the circular places the responsibility of sending a confirmatory SMS on the Depository based on the confirmation received from ESPs.
  • Sharing of necessary details and logs by Depositories with ESPs and sharing of electronic logs and other related information with respect to e-voting transactions with Depositories by ESPs as proposed in the consultative paper has been done away with in the circular.

To dos for Depositories and ESPs

Depositories

  • Accountable for authentication – The Depository has been made responsible to carry out the authentication of the shareholders and voting will be allowed by ESPs based on the Depository’s authentication.
  • Flash messages/ reminders – Another step taken to increase participation is SMS/ email alerts by the Depository to the demat account holders atleast 2 days prior to the date of the commencement of e-voting. The listed entity shall provide the details of its upcoming AGMs requiring voting to Depository who shall then send a SMS/ email alerts.
  • Dedicated helpline – Depositories to establish a dedicated helpline to resolve technical difficulties faced by shareholders relating to the e-voting facility

ESPs

  • Dedicated helpline- listed companies shall ensure that the ESPs engaged by them also provide a dedicated helpline in this regard.
  • Better Disclosure- To enable shareholders to take informed decisions while voting on any proposed resolution of a Company, ESPs has been instructed to provide web-link to the disclosures made by the Company on the stock exchange website and report on the website of the proxy advisors.

Conclusion

This framework for one stop log-in has only been made mandatory in respect of public non-institutional shareholders/ retail shareholders and the existing process may continue for all physical shareholders and shareholders other than individuals viz. institutions/ corporate shareholders. Further, SEBI’s perception on the current shareholder participation is based on its public consultation and is probably because, the shareholders are not taking the trouble of registering themselves with the various ESPs.

The step taken by SEBI towards a more democratic participation of the shareholders may be effective in the long run. However, its current effectiveness seems to be doubtful unless the shareholders for whom the same has been made, find it useful and be ready to implement the same.

 

[1] https://www.sebi.gov.in/reports-and-statistics/reports/mar-2020/consultative-paper-on-e-voting-facility-provided-by-listed-entities_46213.html

[2]https://www.sebi.gov.in/legal/circulars/dec-2020/e-voting-facility-provided-by-listed-entities_48390.html 

SEBI proposes enhanced disclosures for meetings with analyst, investors, etc.

– To curb information asymmetry and risk of divulging UPSI

 Shaifali Sharma | Vinod Kothari and Company

corplaw@vinodkothari.com

Introduction

Analyst and investor meets are one of the many ways of communicating and sharing information. Conducting periodical meetings, conferences, one-to-one meetings or con-calls with analysts or investors who wish to know more about the company, its historic performance, financial details, future prospects, etc. is a common practice for the listed entities.  The most common amongst these meetings are the earning calls which is called immediately following the release of the quarterly or annual financial results. Whereas, one-to-one meets or conference calls with selective investors/ analysts are also conducted in the normal course of business of the companies.

With the intent to rule out any information asymmetry in the market, the schedule, presentations or any information material used during such  analyst or institutional investor meetings are required to be disclosed by companies to stock exchange(s) and also hosted on the company’s website as required under the SEBI (Listing Obligations and Disclosure Requirements), Regulations, 2015 (‘Listing Regulations’).

Moreover, the SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘PIT Regulations’) requires fair disclosure of material events and therefore, provides principles for fair disclosure which includes

  • publication of transcripts or recordings of analyst/ investor meetings on company’s website; and
  • ensuring information shared with analysts and research personnel is not an unpublished price sensitive information (‘UPSI’).

The governing Regulations are discussed in this article.

However, looking at the practice of most of the listed companies, it has been observed that such disclosures are simply box ticking exercise where disclosure of mere PowerPoint slides of presentation are given instead of what is discussed in the meeting to give an example.

The concerns relating to disclosures in respect of analyst meets/ institutional investors meet/ conference calls were discussed by Primary Market Advisory Committee (‘PMAC’) constituted by SEBI in July, 2020 which then formulated a Sub-Group to recommend specific disclosure requirements to strengthen analyst/ investor meets. In this regard, a ‘Report on disclosures pertaining to analyst meets, investor meets and conference calls[1]’ (‘Report’) has been issued on November 20, 2020 seeking public comments on or before December 21, 2020. The Sub-Group has recommended to make the disclosure requirements optional for the initial one year and mandatory thereafter for all the listed companies. This article attempts to analyse the recommendations and their probable impact on the current regime under the Listing Regulations and PIT Regulations.

Further, on perusing the Report it has been observed that it explicitly distinguishes between scheduled meeting with the analysts and investors and unscheduled one-to-one calls with them. This article discusses the intention behind such distinction recognised by SEBI itself.

Current Regulatory Framework in India governing Analyst/ Institutional Meets

Listing Regulations

Regulation 46(2)(o) of the Listing Regulations requires the listed entity to disseminate the schedule of analyst or institutional investor meet and presentations made by the listed entity to analysts or institutional investors simultaneously with submitting the same to the stock exchange. The aforesaid Regulation is reproduced below:

“46(2) The listed entity shall disseminate the following information under a separate section on its website:

xxx

(o) schedule of analyst or institutional investor meet and presentations made by the listed entity to analysts or institutional investors simultaneously with submission to stock exchange;”

Further, Part A(A)(15) of Schedule III of the Listing Regulations read with SEBI circular[2] dated September 09, 2015, requires the listed entity to disclose the schedule of analyst or institutional investor meet and presentations on financial results made to such analysts or institutional investors without any application of the guidelines for materiality as specified u/r 30(4) of the Listing Regulations.

Furthermore, Part C(8)(e) of Schedule V of the Listing Regulations requires the listed entity to disclose the presentations made to the institutional investors or analysts in the section on the Corporate Governance of the Annual Report under the head ‘Means of Communication’.

Apart from above requirements, principles governing disclosures and obligations of listed entity shall be simultaneously conformed viz.  to provide adequate and timely information to recognised stock exchange(s) and investors, provide adequate and timely information to shareholders, to ensure timely and accurate disclosure on all material matters including the financial situation, performance, ownership, and governance of the listed entity, etc. 

PIT Regulations

Pursuant to Regulation 8 of PIT Regulations, every listed company is required to formulate a Code of Fair Disclosure and Conduct for fair and timely disclosure of UPSI in compliance with the principles set out in Schedule A to the PIT Regulations. The principles of fair disclosure w.r.t analyst meet is as follows

  • to ensure that information shared with analysts and research personnel is not UPSI; and
  • to develop best practices to make transcripts or records of proceedings of meetings with analysts and other investor relations conferences on the official website to ensure official confirmation and documentation of disclosures made.

Regulatory Regime in other Countries

Country Name Disclosure Requirement

 

USA
  • The Regulation FD[3] (for “Fair Disclosure”) issued by the Securities and Exchange Commission provides that an issuer or his official while entering into a private discussion with an analyst who is seeking guidance about earnings estimates, shall not communicate any material non-public information (MNPI).
  • It does not prohibit from communicating material non-public information to an analyst, the company may do so after making public disclosure of such information.
  • No practice of recording or transcribing the investor meetings
UK
  • Market Abuse Regulations[4] prevents companies from making selective disclosure of MNPI.  If the company do so, an immediate announcement would be required but it would still be a breach of the regulations
  • No practice of recording or transcribing these investor meetings
Singapore
  • Rule 703(4)[5] of the Singapore Exchange Listing Rules requires the issuer to observe the Corporate Disclosure Policy[6] as provided under Appendix 7.1. of the Rules. Para 23 under PART VIII of the Policy recommends the issuer to observe an “open door” policy in dealing with analysts, journalists, stockholders and others.
  • Issuer is required to abstain from disseminating material information which has not been disclosed to the public before. However, if such material information is inadvertently disclosed at meetings with analysts or others, it must be publicly disseminated as promptly as possible by the means described in Part VIII.
Canada
  • The Canadian Securities Exchange specifies prescribes Policy on ‘Timely Disclosures’[7] to be complied by the issuer. Para 7.1 provides that disclosure of information shall not be on selective basis. The policy classifies private meetings with analysts, brokers and investors as a good corporate governance activity. However, the policy provides that no material unpublished information is disseminated in such meetings.

Extant gaps in disclosure requirements

Information Asymmetry

As discussed above, the Listing Regulations require the listed entities to disclose the schedules and presentations for analyst or institutional investor meetings on its website and to the stock exchange(s) with 24 hours of the event taking place. However, except for few top companies, majority of the listed companies treat this as a mere formality. They disclose only the occurrence of analyst/ investor meets and circumvent disclosure of significant details of the said event.

As per the Report, it has been observed that the reports shared by the listed entities have information that does not have its source from quarterly results or investor presentation and thereby lead to selective sharing of information. Therefore, it is seen that there exists information asymmetry due to following the Regulations in letter and not in spirit.

Selective disclosure and Risk of divulging UPSI

Selective disclosure occurs when a company releases UPSI about the company to an individual or selective group of persons (e.g., analysts or institutional investors) before disclosing the information to the general public. It creates an adverse impact on market integrity similar to that of insider trading. Selective disclosure lead to asymmetry information.

For example, analyst/ investors during a one-to-one meet are provided with such price sensitive information which may not be disclosed in presentation or the financial results and is not available in public domain.

Therefore, issues concerning selective sharing of information, disclosure of incomplete information, inconsistency in the disclosures made by different listed companies have made it essential for SEBI to review the current regulatory requirements and further strengthen the disclosure regime.

Conflicting views of Kotak Committee on Investor/ Analyst meets

The Committee on Corporate Governance constituted under the Chairmanship of Mr. Uday Kotak Committee (‘Kotak Committee’) by SEBI issued its ‘Report on Corporate Governance[8]’ in October, 2017 wherein it took a contrary view and stated that disclosure of schedule of investor/ analyst meetings does not serve any practical purpose and therefore may not be required. Relevant extract provided below:

“The Committee was of the view that the disclosure of schedules of analyst/institutional investor meetings does not serve any practical purpose, and there have been instances of its misuse. Hence, the Committee recommended that the disclosure of schedules of analyst/institutional investor meetings may not be required. To clarify, the information to be shared at such meetings has to be strictly in compliance with the SEBI PIT Regulations.”

On the other hand, the present Report has considered institutional investors meet or conference call with analysts/ shareholders as a material event and emphasis has been placed on strengthening the disclosure framework. It is significant to note that while the Kotak Committee was of the view that putting up the schedule for investors meeting have the potential of being misused, the Sub-Group constituted by the PMAC holds a completely contrary view and has not recommended to do away with the said practice.

The Recommendations:  Enhanced disclosures w.r.t analyst / investor meets/ conference calls

New disclosure requirements pertaining to post-earnings conference calls/quarterly calls

Listed companies generally organise analyst / investor meetings or conference calls after the release of quarterly financial results. To curb any information asymmetry among different class of stakeholders, the following recommendations are proposed:

  • audio/video recordings
    • host on the website and share with the stock exchange(s)
    • immediately after the earnings call/ con-call/ analysts meeting before the next trading day or within 24 hours from the occurrence of event or information, whichever is earlier;
  • written transcripts
    • host on the website of the listed entity and respective stock exchanges within 5 working days after the event;
  • make available audio/video recordings and the written transcripts on the website
    • for a period of atleast 8 years in addition to the details disseminated on respective stock exchanges.

The idea is to immediately disclose any UPSI shared at such conference calls. Some of the top listed companies like Tata Steel[9], Reliance Industries[10], Infosys[11], Pricol Ltd[12], Power Finance Corporation Ltd[13], have already adopted the above practices and upload the audio/video recordings, transcripts of analysts / investor conference calls on their respective websites. The recommendations will now require the other listed companies to put in place an effective disclosure mechanism in this regard.

Discretion of companies to limit attendees of conference calls

Unlike in US, Indian listed companies generally restrict the conference calls to their respective analysts / investors only to avoid any unnecessary disruption of call, presence of competitors, etc.

However, genuine institutional investor or analyst may get excluded from participating in the meeting and thus, Sub-Group suggested that companies should make the provision of inclusion of certain individuals based on their request and on verification of their credentials.

Accordingly, Sub-Group has recommended to leave the discretion with the listed companies for deciding the participants for such meetings.

One-to-one meetings – Selective or effective disclosures?

Listed companies in their course of business are often seen conducting one-to-one meetings/ con-calls with investors / analysts (‘private meets’). Such private discussions are more risky due to the following:

  • unscheduled and unplanned;
  • company officials not prepared;
  • no presentation/ information statement for discussion;
  • greater risk of disclosing UPSI

Even if a company wishes to make public the proceeding of such meeting/ call, the investor may not agree to share private call records in public domain.

However, by disclosing one-to-one affairs, chances of information asymmetry will reduce. Also, other investors, particularly the minority investors, who are generally not a part of such meets may be benefitted from effective price discovery. Besides investors, regulatory authorities and stock exchanges will also be able to track such meets for any future references.

In view of the above, Sub-Group has made following recommendations:

  • listed companies to provide number of one-to-one meetings with select investors as part of corporate governance report submitted by them to stock exchanges on a quarterly basis;
  • an affirmation that no UPSI was shared by any official of the company in such meetings shall also be provided along with the corporate governance report;
  • company shall maintain a record of all such one-to-one meetings. The data should be preserved for a period of atleast 8 years.

Unlike in case of post-earning calls, it seems recording and disclosure of private meets is not required. It is always better to look before you leap, hence companies must consider recording such private meets (written or audio) and making it public to avert possibility of selective disclosure and leak of material information.

Further, in addition to the affirmation by official of company involved, a confirmation from the concerned party (investor/ analyst) shall also be obtained confirming that no material public information was shared with the concerned analyst during such meeting, and that the information shared in the meeting was only clarification of facts/information already available in public domain.

Concluding Remarks

After the recommendations of Kotak Committee in the year 2017 to discard the requirements of disclosing the schedule of analyst / institutional investor, a new approach of SEBI to enhance transparency and strength disclosure framework of analyst/ investor meets is evident from the recommendations of the Sub-Group.

An effective disclosure mechanism will be required to be put in place by companies for adequate and timely disclosures. A measure of ‘silent or quiet period’ may be adopted where companies for a specified period (generally prior to release of financial results) refrain from interaction with the analyst/ investor/ media in order to avoid inadvertent disclosures of UPSI on selective basis. To conclude, the recommendations seems to promote a culture of corporate governance encouraging companies to follow the compliance in spirit of law.

 

 Other reading materials on the similar topic:

  1. ‘A date to remember: Ad-hoc Analyst/Investor meets become a passé affair’ can be viewed here
  2. Our other articles on various topics can be read at: http://vinodkothari.com/

Our Youtube Channel: https://www.youtube.com/channel/UCgzB-ZviIMcuA_1uv6jATbg

 

 

[1] https://www.sebi.gov.in/reports-and-statistics/reports/nov-2020/report-on-disclosures-pertaining-to-analyst-meets-investor-meets-and-conference-calls_48208.html

[2] https://www.sebi.gov.in/legal/circulars/sep-2015/continuous-disclosure-requirements-for-listed-entities-regulation-30-of-securities-and-exchange-board-of-india-listing-obligations-and-disclosure-requirements-regulations-2015_30634.html

[3] https://www.sec.gov/rules/final/33-7881.htm

[4] https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32014R0596

[5] http://rulebook.sgx.com/rulebook/703-0

[6] http://rulebook.sgx.com/rulebook/appendix-71-corporate-disclosure-policy

[7]https://webfiles.thecse.com/resource/CSE%20Policy%205%20%E2%80%93%20Timely%20Disclosure,%20Trading%20Halts%20and%20Posting%20Requirements.pdf

[8] https://www.sebi.gov.in/reports/reports/oct-2017/report-of-the-committee-on-corporate-governance_36177.html

[9] https://www.tatasteel.com/investors/financial-performance/analyst-call-recording/

[10] https://www.ril.com/InvestorRelations/FinancialReporting.aspx

[11] https://www.infosys.com/investors/news-events/analyst-meet/2020/india/main.html

[12] https://www.pricol.com/investor-call-transcripts.aspx

[13] https://www.pfcindia.com/Home/VS/109