Partner, Vinod Kothari and Company
National Financial Reporting Authority (‘NFRA’) being a quasi-judicial authority has been empowered by the Central Government to independently regulate and monitor the accounting and auditing standards (‘A&AS’). The intent of NFRA is to oversee the quality of A&AS of large entities as mentioned under Rule 3 (1) of the NFRA Rules.
Evidently NFRA intends to oversee the A&AS of large entities in terms of being listed or the size of the company or being functionally different entities like electricity companies or insurance companies, etc. Such entities have the presence of its subsidiaries and associates all around the world which may be contributing materially in terms of Rule 3 (1) (e) of the NFRA Rules to the net worth and turnover of the Indian parent entity.
While the last date for filing one time return by bodies corporate is approaching fast i.e. 31st July, 2019, there seems to a lot of ambiguity in the applicability of the NFRA Rules.
This note has been prepared with the intent to showcase the conflict between the provisions of the Companies Act, 2013 (‘Act’) read with its allied Rules and the FAQs issued by NFRA.
Various Provisions of the Act applying to bodies corporate
- Applicability section of the Act
The first section of the Act laying down the applicability of the Act clearly mentions the following under clause (f) of sub-section (4) – “such body corporate, incorporated by any Act for the time being in force, as the Central Government may, by notification, specify in this behalf, subject to such exceptions, modifications or adaptation, as may be specified in the notification.”
This provision makes it very clear that the Ministry of Corporate Affairs (‘MCA’) has been vested with the powers of applying the provisions of the Act to any bodies corporate. Further, the provision is also quite clear that such body corporate may be either incorporated under the Act or any other Act. This implies that even for foreign companies, the MCA has the power to apply the provisions of the Act subject to the changes as may be notified.
- Definition of the term body corporate
Section 2 (11) defines the term ‘body corporate’ to include a company incorporated outside India. Here also, the intent of law is explicitly clear to cover the bodies corporate governed by foreign laws.
- Chapter 22 of the Act
Section 379 (2) of the Act provides that a foreign company which is substantially owned and controlled by an Indian citizen or by an Indian company is required to comply with the provisions of the Act as mentioned thereunder.
Areas of conflict
While the consolidated financial statements of the Indian parent entities include the accounts of the subsidiaries and associates also, it cannot be argued that the quality of auditing and accounting is anywhere less relevant than the A&AS of the Indian parent. Therefore, it seems in fitness of things under clause (e) of Rule 3 (1) of the NFRA Rules to include foreign subsidiary and associates if they fulfil the condition of materiality under the said Rules (foreign subsidiaries and associates whose income or net worth exceeds 20% of the consolidated income and net worth of the Indian parent [‘material subsidiaries and associates]).
However, the FAQs issued by NFRA have taken a different stand altogether with respect to the applicability of the NFRA Rules. It states that only those material subsidiaries and associates are covered under the scope which are having place of business in India.
While it sounds very surprising that if this wouldn’t have been the case, the condition of the foreign subsidiaries and associates which has an Indian parent, doing business back in India is very unlikely.
In any event, if merely by not having a business in India absolves the material subsidiaries and associates from the overview of the NFRA that would frustrate the whole intent and objective of the NFRA and allow such subsidiaries and associates to escape from the regulation of NFRA by virtue of the additional clause in the FAQs.
It seems that this condition of having business in India should have either be mixed with section 379 of the Act which talks about foreign companies having business in India or should may have actually been intended to be referred to the Indian parent’s business in India.
Further, if the question is one of jurisdiction as of how the Act extends its application to foreign bodies corporate not having business in India is concerned, it may be noted that section 1 (4) of the Act allows the Central Government to extend the provision of Act to bodies corporate, and it may therefore, it may be construed that in a manner of speaking is actually extended to foreign bodies corporate which have a business connection in India by virtue of having an Indian parentage.
One of the major questions in front of the stakeholders is the jurisdiction of NFRA which the FAQs have seemingly restricted to bodies corporate having place of business in India. However, considering the other provisions of the Act, it is quite clear that NFRA has been constituted not only to govern the auditors registered in India but also those in abroad as MCA has left number of provisions open under the Act which applies to bodies corporate.
If one interprets the applicability of NFRA on Indian bodies corporate, the whole intent and object of setting this regulatory body will get frustrated.
Amendment to Section 89 and insertion of Section 90 are one of the key amendments brought in by the Companies (Amendment) Act, 2017 (‘Amendment Act’). The said provisions were enforced w.e.f. June 14, 2018and Companies (Significant Beneficial Owners) Rules, 2018 were notified (‘SBO Rules’). MCA, thereafter, issued General Circular No 7/ 2018for extending the last date of filing eForm BEN-2 and 08/ 2018 to the effect that the format of declaration to be submitted by Significant Beneficial Owner (SBO) will undergo revision.
MCA on February 8, 2019 amended SBO Rules by amending the definition of significant beneficial owner. The due date for submission of declaration in Form BEN-1 was 90 days from the said amendment. However, eForm for filing the said declaration with MCA was not made available.
MCA, on July 1, 2019, issued Companies (Significant Beneficial Owners) Second Amendment Rules, 2019thereby notifying eForm BEN-2 required to be submitted by companies.
Scope of Section 90
Section 90 focuses on the identification of a ‘significant beneficial owner’ through his ‘indirect holdings’ in an entity, which is to be considered only where the individual has majority interest in the vehicle holding stake in the “reporting company”, or in the ultimate holding entity of such holding vehicle. That is to say, simply direct holding or direct control, or direct significant influence (without any indirect holdings) were not required to be reported as significant beneficial interest under the Rules, irrespective of the magnitude of direct holding. Therefore, the direct holding of interest by an individual is relevant only if the direct holding may be clubbed with indirect holding.
Onus of making the declaration
The individual holding significant beneficial interest by virtue of holding shares or voting rights or right to distributable dividend or exercising significant influence was required to furnish the declaration in Form No. BEN-1 within 90 days of February 8, 2019 and thereafter in case of any change, to the reporting company. Herein, the onus lies on the individual to come forward and submit the declaration. The reporting companies on the other hand were required to give notice to members (other than individual) holding 10% or more of participating interest [either of shares, voting rights, or right to receive or participate in the dividend or any other distribution], seeking information about the individual who is significant beneficial owner in the reporting company in Form BEN-4.
It is pertinent to note that the obligation of the individual to self-declare his significant beneficial holdings and the obligation of the company to send notice seeking information from members in terms of Rule 2Aare independent obligations.
Intimation to the ROC by the reporting entity
As per the SBO Rules as amended from time to time, the declaration of beneficial interest is required to be filed in e- Form BEN-2 with the Registrar in respect of such declaration, within a period of thirty days from the date of receipt of declaration by the company.
With the deployment of e-Form BEN -2 vide Companies (Significant Beneficial Owners) Second Amendment Rules, 2019, the Companies shall be required to intimate the same to the Registrar within 30 days of its deployment.
Companies are facing difficulty in identification of SBO in view of complex structures. Until receipt of declaration in Form BEN-1, companies will not be able to file eForm BEN-2.
Consequences of non-filing
Section 90(11) of the Act, 2013 provides for penal provisions for the failure of the part of the company and every officer in default in complying with the provisions of Section 90(4) i.e. filing of the above return and changes therein with the Registrar with a fine:-
- For company and every officer in default:- Rs. 10 Lakhs – Rs. 50 Lakhs
- For Continuing default: – Upto Rs. 1000 for every day after first day of failure.
Analysis of e-Form BEN -2
- Declaration of holding reporting company
Pursuant to Rule 8 of the SBO Rules, which states that the rules are not applicable to the extent the shares of the reporting company is held by its holding reporting company. It is presumed that the SBO of the holding company is also the SBO of the subsidiary company for the shares held by the holding company.
First bullet of Field no. 3 requires the companies to report the details of such holding reporting company which shall be mapped through the CIN of such company.
- Requirement to furnish copy of agreement
In order to specify the manner in which significant beneficial interest is being held or exercised either indirectly or together with any direct holding or right, the form requires attachment of agreement in following cases:
- Exercise of control
- Exercise of significant influence
This might be a serious constraint, as it may not be necessary that the companies might have in place a written and executed agreement specifying the control and/ or significant influence exercised by the members. However, at present the mode of mapping of control and/ or significant influence has only been done through the agreement to be attached in the form.
While, the eForm BEN-2 seems a derivative of the format of declaration Form BEN no. 1, companies will be able to report correctly subject to receipt of accurate declarations from the SBOs.
Other practical difficulties in reporting in the eForm can be ascertained once the eForm is deployed on MCA portal.
Other related articles on SBO can viewed here-
By Dibisha Mishra (email@example.com)
SEBI’s recent Discussion Paper[i] on amendment to the SEBI (PIT) Regulations, 2015 presses the fact that mere Regulator’s watch on the illegal transactions are not enough to practically eliminate trading on the basis of UPSI. Wherein insiders are finding new ways to get into such illegal transactions including transactions through proxy, difficulty in tracking and proving the same even if they are tracked remains a challenge for SEBI. Hence, to ensure better tracking and maintain the integrity of the securities market, the regulator is intending to bring in informants to the stage. The informants shall basically be the employees or any other person who observes actual or suspected cases on insider trading. Such mechanism shall have a dedicated reporting window and also provide for ‘near absolute confidentiality’ to so that the informants are not deterred by the fear of retaliation or discrimination or disclosure of personal data.
Is this altogether a new concept?
Such Informant Mechanism, is not a new concept brought in to tackle the issue of insider trading altogether. Several other regulation though out the globe have been following the same practice. One such example being UK’s Market Abuse Regulation (596/2014) which provides similar kind of reporting mechanism. This concept is similar to ‘Whistle Blower Policy’ for frauds as provided under the Companies Act, 2013. However, SEBI’s Informant Mechanism enables reporting to the regulator directly rather than routing the same to the Company’s management itself. It also takes a step further to incentivize the informants to encourage pro-active reporting.
The salient features of the proposed Informant Mechanism shall be as follows:
- Voluntary Information Disclosure Form where information can be reported.
- Disclosure on source of information: The information should be original and not sourced from any other person
- Office of Informant Protection(OIP): A dedicated department separate from investigation and inspection wings.
- Submission of Information: either by himself or through a practicing advocate where the informant decides to report unanimously.
- Confidentiality of Informant shall be maintained throughout the proceedings, if any, initiated by SEBI unless evidence of such informant is required such proceedings.
- Information reported shall be taken up further if the same is material. Such information may further be forwarded to the operational department for suitable actions only after slashing down the identity details of the informant.
- Reporting of the functioning of OIP on an annual basis to SEBI.
- A dedicated hotline to guide persons on how to file information.
- Grant of reward where information provided as as per informant policy and amount of disgorgement exceeds Rs. 5 crores. The reward shall be paid from IEPF account.
- Provision for amnesty.
- Smaller cases nor covered: While the proposed Informant Reward Policy is headed to incentivize the informant to promote pro-active reporting of insider trading transactions which were earlier left undetected, the department also proposes to put the minimum threshold for the amount of disgorgement. Only those information revealing insider trading transaction amounting to Rupees Five Crores or more shall be taken up for the purpose of rewarding. This clause itself slashes down majority of comparatively smaller but rather more frequent transactions from coming under its purview.
- Material cases: Proposed policy states that only those cases that are material shall be processed further. The official who shall be responsible to determine whether the information is material is nowhere mentioned.
- Tracking System: The policy mentions no such system of tracking by the informants regarding the status of information by them.
The discussion paper indicates SEBI’s intention to buckle up its systems for tracking down insider trading transactions and take appropriate action. However, the extent to which the proposed policy gets implemented along with modifications, if any, is yet to be seen.
Munmi Phukon, Principal Manager
Vinod Kothari & Company
The Ministry of Corporate Affairs, on 30th May, 2019 issued a Notification amending Schedule VII of the Companies Act, 2013 (Act) which seeks to include disaster management, including relief, rehabilitation and reconstruction activities under CSR activities. The amendment is very crucial considering the recent history of natural disaster the country had witnessed and this was always an expectation of the corporate sector from the Government.
Provisions of law
The Act through Section 135 puts a social obligation on certain class of companies on the basis their turnover and net profits to spend 2% of the average net profits of past 3 years in the activities mentioned in the Schedule. However, the contribution to any disaster management/ relief activities was not specifically covered in the Schedule except for Prime Minister’s National Relief Fund. This was an insufficiency of law due to which the companies were, in a way, forced to restrict themselves to the PM’s Fund despite of their wish to contribute in other funds or to decline the benefit which the society deserves in such circumstances.
The two- fold benefit
Seemingly, the amendment has come out with a relief to the corporates as well as to the society at large. Therefore, the benefit is said to be a two- fold benefit which, in one hand, will ensure welfare of the society and the environment in need and in the other, it will help the corporates deployment of the minimum allocated CSR fund in needy areas in a more effective way.
By CS Smriti Wadehra | firstname.lastname@example.org
MCA on January 22, 2019 had issued a Notification prescribing certain amendments in the Companies (Acceptance of Deposits) Rules, 2014 (‘Rules’) requiring every company (except government companies) to file:
- a return of deposit;
- particulars of transaction not considered as deposit; or
It is a one-time filing return, specifying the details of outstanding receipt of money or loan which have not been considered as deposits under the Rules. For filing the said dorm, the Rules specified that the reporting should be of receipt of money or loan from April 1, 2014 till January 22, 2019 and which are outstanding as on the date of filing. Further, the reporting should be done within 90 days from January 22, 2019. However, the e-form for such filing was not released by MCA.
Thereafter, on April 30, 2019, MCA vide its Notification dated April 30, 2019 notified the Companies (Acceptance of Deposits) Second Amendment Rules, 2019, according to which the reporting in the one-time return (i.e., e-form DPT-3) has to be done for receipt of money or loan from April 1, 2014 till March 31, 2019. Also, the filing due-date has been extended to ninety days from March 31, 2019.
This extension was much required as the electronic version of the said form was not released by MCA. However, MCA has on the same day released the e-form as well and hence, we shall now discuss the requirements of the said form.
Requirement of Law
Referring to the erstwhile notification read with the recent general circular of MCA dated April 13, 2019, we may summarise the reporting requirement of e-Form DPT-3 as under:
- One time return giving the details of the outstanding receipt of money or loan which have not been considered as deposits as per Rule 2(1)(c) of the Rules for the period from 1st April, 2014 till 31st March, 2019;
- Periodic return which will give the details of particulars of transactions which are not considered as deposits as per Rule 2(1)(c) of the Rules within 30th June of every year containing details as on 31st March;
- Return for deposit which is to be filed within 30th June of every year.
At the advent of notification of the Rules, companies were under ambiguity as to how the reporting of such one-time return shall be done. Further, the e-Form also required auditor’s certificate as an attachment, but it was unclear that whether companies whwich have not received any amount as deposit were also required to provide an auditor’s certificate in this regard. Moreover, there were confusion as whether companies have to provide audited figures in the said form or otherwise. However, the e-Form was expected to clear these confusions.
Anomaly in e-Form
Even after the release of the much awaited form, the anomaly still exists. Following are the certain ambiguities in the e-Form, for which MCA’s clarification shall be awaited:
a) Whether DPT-3 required to be filed twice?
Rule 16 of Companies (Acceptance of Deposits) Rules, 2014 provides:
“Explanation.- It is hereby clarified that Form DPT-3 shall be used for filing return of deposit or particulars of transaction not considered as deposit or both by every company other than Government company.”
Further, the provisions of Rule 16A of Companies (Acceptance of Deposits) Rules, 2014 provides:
“Every company other than Government company shall file a onetime return of outstanding receipt of money or loan by a company but not considered as deposits, in terms of clause (c) of sub-rule 1 of rule 2 from the 01st April, 2014 to the date of publication of this notification in the Official Gazette, as specified in Form DPT-3 within ninety days from the date of said publication of this notification along with fee as provided in the Companies (Registration Offices and Fees) Rules, 2014.”
On the combined reading of the aforesaid provisions, we understand that companies have to file e-Form DPT-3 as an annual requirement only, as a return of deposit of transactions not considered as deposits every year by 30th June and also as a one-time return of outstanding money not considered deposits from 01.04.2014 to 31.03.2019. However, the e-Form as well as the Rules does not specify any such requirement. Accordingly, companies are still under the ambiguity as – whether filing of only one-time return shall suffice for this financial year or two separate filing has to be done.
b) Requirement of attaching auditor’s certificate
The e-Form DPT-3 requires companies to attach auditor’s certificate. Though not mandatory attachment, the companies are unclear as to whether the amount to be mentioned in the return has to be audited by a statutory auditor and a certificate of auditor has to be attached in each case or management certified accounts shall suffice? The e-Form does not clarify the instance.
Further, companies which shall be filing that they have not accepted any deposit or the money accepted does not qualifies to be a deposit – in such case, it is still unclear whether the auditor’s certificate certifying the company’s declaration is required or not.
Despite the time taken by the Ministry for coming up with the e-Form, we understand that there are still many irregularities in the e-Form as discussed briefly in our note and which has to be addressed by the Ministry. Meanwhile, considering the first day of deployment of this e-Form, we assume that there will be certain revision in the said form which might address the ambiguities.
You may also read our article on “MCA requires reporting of ‘what is not a deposit’ here- Link to the article
By Dibisha Mishra (email@example.com) (firstname.lastname@example.org)
There has been a series of changes brought in by the Ministry of Corporate Affairs (“MCA”) in recent years to bring in better transparency, easier compliance and weed out hurdles in the way of Ease of doing Business. In furtherance of the same, MCA vide notification dated 29th March, 2019, notified Companies (Incorporation) Third Amendment Rules, 2019 (hereinafter referred to as “Amended Rules”)[i] which has upgraded the existing SPICe form with a view to bring in a single window system for making application under GST, Employees Provident Fund Organization (‘EFPO’) and Employees State Insurance Corporation (‘ESIC’).
These additional services are being catered via e-form INC-35 named as ‘AGILE’ which shall be linked with SPICe (e-form INC-32) during filing with MCA. It is to be noted that though linking of the form is mandatory, option of availing the aforementioned services is left to the applicant. The company can very well choose the services which it wishes to avail.
The main features along with the technicalities of the incorporation process prior to the Amended Rules have been covered in our earlier article[ii]. This write up covers the highlights of AGILE along with a brief discussion on some practical aspects. Read more