MCA revisits timelines and fees for charge filing
/0 Comments/in Companies Act 2013, Corporate Laws /by Vinod Kothari ConsultantsSEBI amends LODR in relation to equity shares with superior rights
/0 Comments/in SEBI /by Vinod Kothari ConsultantsManoj Kumar Tiwari, Executive, Vinod Kothari & Company
SEBI has vide notification published in the Official Gazette dated July 29, 2019 notified the SEBI (Listing Obligations and Disclosure Requirements) (Fourth Amendment) Regulations, 2019 (‘Amendment Regulations’). The said Amendment Regulations shall come into force from the date of publication in the Official Gazette i.e. July 29, 2019.
The amendments pertain to compliances in relation to corporate governance provisions for listed entities which have issued shares with Superior Rights (SRs). SEBI has issued a framework for issuance of DVR as an outcome of SEBI Board Meeting held on June 27, 2019 some of which have been included in the Amendment Regulations.
Brief of the changes made in line with the framework are as under:
Regulation 17(1) w.r.t. Board Composition
- Atleast half of the board of directors of the listed company which has outstanding SR equity shares shall comprise of independent directors;
Regulation 18(1)(b) w.r.t. Audit Committee Composition
- The audit committee of a listed entity having outstanding SR equity shares shall comprise only of independent directors;
Regulation 19(1)(c) w.r.t. Nomination and Remuneration Committee (NRC) Composition
- Two third of the NRC of a listed entity having outstanding SR equity shares shall comprise of independent directors;
Regulation 20(2A) w.r.t. Stakeholders Relationship Committee (SRC) Composition
- Two third of the SRC of a listed entity having outstanding SR equity shares shall comprise of independent directors;
Regulation 21(2) w.r.t Risk Management Committee (RMC) Composition
- Two third of the RMC of a listed entity having outstanding SR equity shares shall comprise of independent directors;
Regulation 41(3) w.r.t prohibition on issue of shares with SR substituted with the following
- The listed entity shall not issue shares in any manner that may confer on any person;
- superior or inferior rights as to dividend vis-à-vis the rights on equity shares that are already listed; or
- inferior voting rights vis-à-vis the rights on equity shares that are already listed:
- a listed entity having SR equity shares issued to its promoters/ founders, may issue SR equity shares to its SR shareholders only through a bonus, split or rights issue in accordance with the provisions of the SEBI (ICDR) Regulations, 2018.
Regulation 41A – Other provisions relating to outstanding SR equity shares
A new regulation has been inserted w.r.t SR equity shares
- The SR equity shares shall be treated at par with the ordinary equity shares in every respect, including dividends, except in the case of voting on resolutions.
- The total voting rights of SR shareholders (including ordinary shares) in the issuer upon listing, pursuant to an initial public offer, shall not at any point of time exceed seventy four per cent.
- List of Circumstances in which SR equity shares shall be treated as ordinary equity shares in terms of voting rights viz. appointment/ removal of IDs, RPTs involving SR shareholder, Voluntary winding up, Voluntary resolution process under IBC, changes in AOA/ MOA except change affecting SR equity share, delisting of equity shares etc.
- Conversion of SR equity shares into ordinary shares w.e.f. 5 years after listing of the ordinary shares. The same can be extended for further 5 years after passing a resolution to that effect, with the SR shareholders abstaining from voting.
- Circumstances when SR equity shares shall be mandatorily converted into ordinary shares viz. demise of promoter holding such shares, SR shareholder resigning from executive position, merger or acquisition of listed entity resulting in SR shareholders cease to have control etc;
The notification in the Official Gazette can be accessed here: http://egazette.nic.in/WriteReadData/2019/209215.pdf
The outcome of the SEBI Board Meeting held on June 27, 2019 can be accessed here: https://www.sebi.gov.in/media/press-releases/jun-2019/sebi-board-meeting_43417.html
The following Regulations have also been amended to include shares with superior voting rights.
SEBI (Delisting of Equity Shares) Regulations, 2009
Regulation 3 w.r.t applicability of the regulation
The term ‘shares’ shall include equity shares having superior voting rights.
The said amendment can be accessed here: http://egazette.nic.in/WriteReadData/2019/209243.pdf
SEBI (Buy-Back of Securities) Regulations, 2018
Regulation 3 w.r.t applicability of the regulation
The term ‘shares’ shall include equity shares having superior voting rights.
The said amendment can be accessed here: http://egazette.nic.in/WriteReadData/2019/209214.pdf
RBI eases end-use ECB norms for Corporates and NBFCs
/2 Comments/in FEMA, NBFCs, RBI /by Vinod Kothari ConsultantsTimothy Lopes, Executive, Vinod Kothari & Company
Introduction
The Reserve Bank of India (RBI) has wide press release[1] dated 30. 07. 2019 revised the framework for External Commercial Borrowings based on feedback from stakeholders, and in consultation with the Government of India, by relaxing the end-use restrictions with a view to ease the norms for Corporates and NBFC’s. The changes brought about can be found in the RBI Circular[2] on External Commercial Borrowings (ECB) Policy – Rationalisation of End-use Provisions dated 30. 07. 2019
Corporate sector continue to face liquidity crunch and this move from RBI is certainly a welcome move.
ECB are commercial loans raised by eligible borrowers from the recognised lenders for the permitted end use prescribed by RBI.
The ECB framework in India is mainly governed by the Foreign Exchange Management Act, 1999 (FEMA). Various provisions in respect of this type of borrowing are also included in the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018[3] framed under FEMA.
The RBI has also issued directions and instructions to Authorised Persons, which are compiled and contained in the Master Direction – External Commercial Borrowings, Trade Credit, and Structured Obligations[4].
Relaxation granted in end-use restrictions
In the earlier framework as covered in the Master Direction – External Commercial Borrowings, Trade Credit, and Structured Obligations (Master Directions), ECB proceeds could not be utilized for working capital purposes, general corporate purposes and repayment of Rupee loans except when the ECB was availed from foreign equity holder for a minimum average maturity period (MAMP) of 5 years.
Further on-lending out of ECB proceeds for real estate activities, investment in capital market, Equity investment, working capital purposes, general corporate purposes, repayment of rupee loans was also prohibited. These restrictions were made under the end-uses (Negative list) of the Master Direction.
With a view to further liberalize the ECB Framework in view of current hardship being faced by corporate sector; RBI has decided to relax these end-use restrictions.
Accordingly the said relaxations by RBI reflect as under:
| Revised ECB Framework | ||||
| Particulars | ECBs Availed from | By | Permitted End-uses | MAMP |
| Erstwhile Provision | Foreign Equity Holder | Eligible Borrower | · Working capital purposes
· General corporate purposes or, · Repayment of Rupee loans |
5 Years |
| Amended Provision | Recognised Lenders* | Eligible Borrower | · Working capital purposes and,
· General corporate purposes |
10 Years |
| Recognised Lenders* | NBFC’s | · On-lending for:
o Working Capital purposes and, o General Corporate Purpose |
10 Years | |
| Recognised Lenders* | Eligible Borrowers including NBFC’s | · Repayment of Rupee loans availed domestically for capital expenditure and,
· On-lending for above purpose by NBFC’s |
7 Years | |
| Recognised Lenders* | Eligible Borrowers including NBFC’s | · Repayment of Rupee loans availed domestically for purposes other than capital expenditure and,
· On-lending for above purpose by NBFC’s |
10 Years | |
| *ECBs will be permitted to be raised for above purposes from recognised lenders except foreign branches/ overseas subsidiaries of Indian Banks and subject to Para 2.2 of the Master Direction dealing with limit and leverage. | ||||
Relaxation for Corporate borrowers classified as SMA-2 or NPA
Further, Eligible Corporate Borrowers are now permitted to avail ECB for repayment of Rupee loans availed domestically for capital expenditure in manufacturing and infrastructure sector if classified as Special Mention Account (SMA-2) or Non-Performing Assets (NPA), under any one time settlement with lenders.
Permission to Lender Banks to assign loans to ECB lenders
Lender banks are also permitted to sell, through assignment, such loans to eligible ECB lenders, except foreign branches/ overseas subsidiaries of Indian banks, provided, the resultant ECB complies with all-in-cost, minimum average maturity period and other relevant norms of the ECB framework.
These permissions would reduce the burden of the lender banks who classified borrower’s account as SMA-2 or NPA.
Conclusion
Liberalization of the ECB policy by RBI acts as a step toward increased access to global markets by eligible Indian borrowers. In the current scenario of an economic slowdown, these changes come as a push upwards for the Indian economy.
Besides the above-mentioned changes in the Master Direction, all other provisions of the ECB policy remain unchanged.
[1] https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=47736
[2] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11636&Mode=0
[3] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11441&Mode=0
[4] https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11510#1
Other relevant articles of interest can be read here –
Highlights of 2nd Amendment to PIT Regulations
/0 Comments/in SEBI /by Vinod Kothari Consultants-by Dibisha Mishra
(dibisha@vinodkothari.com ; corplaw@vinodkothari.com)
SEBI vide Notification dated 25th July, 2019 further amended the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015. The major part of this amendment is to make curative changes in the Regulations, in response to difficulties expressed by the stakeholders. In this regard, VK&Co. also had occasion to make representation to SEBI, a few of which have been brought in via this amendment.
Highlights of the SEBI (PIT) (Second Amendment) Regulations, 2019.are as follows:
- Employees having access to unpublished price sensitive information are to be identified as ‘designated persons’ [DPs]: Keeping the intent of regulating and monitoring trading by such employees, the earlier provision of identifying them as ‘designated employees’ was merely a laxity in drafting since no corresponding duties/obligations were put upon ‘designated employees’ anywhere in the PIT Regulations.
- Mandatory closure of trading window from the end of every quarter till 48 hours after the declaration of financial results [the word ‘can’ substituted by ‘shall’]
- Permitted transactions by DPs while trading window is closed:
a. off-market inter-se transfer between DPs having possession of the same unpublished price sensitive information where both parties have made informed trade decision;
b. transaction through block-deal mechanism between persons having possession of the same unpublished price sensitive information where both parties have made informed trade decision;
c. arising out of a statutory or regulatory obligation to carry out a bona fide transaction;
d. exercise of stock options in respect of which the exercise price was pre-determined;
e. pursuant to a trading plan;
f. pledge of shares for a bonafide purpose like raising of funds subject to pre-clearance by the compliance office
g. acquisition by conversion of warrants or debentures, subscribing to rights issue, further public issue, preferential allotment or tendering of shares in a buyback offer, open offer, delisting offer: Difficulties were frequently being faced by companies as to whether the trading window bar will apply to corporate actions involving transaction in shares. This amendment makes a clear way out for the same. While only a few corporate actions are listed in the amendment, these should be taken as illustrative rather than exhaustive.
4. In order to qualify as a “material financial relationship”, payment by way of loan or gift should flow from a designated person equivalent to at least 25% of his annual income [excluding payment is based on arm’s length transactions] in last twelve months.
5. Educational institutions from which designated persons have graduated, is to be disclosed to the intermediary or fiduciary on an annual basis and as and when the information changes.
Unregulated Deposit Banning Bill passed by Lok Sabha,2019
/0 Comments/in Corporate Laws, Financial Services, RBI, SEBI /by Vinod Kothari Consultants
The Unregulated Deposit Banning Bill, 2019[1] was introduced in the Lok Sabha on 24th July, 2019 and has since been passed.
The Bill enacts into law the provisions promulgated by a Presidential Ordinance[2] from 21st February 2019.
From our preliminary comparison, it appears that the Bill is largely the same as the text of the Ordinance.
However, a very significant, though very vague, amendment is the insertion of section 41 in the Bill which provides as under: “The provisions of this Act shall not apply to deposits taken in the ordinary course of business”
Of course, one will keep wondering as to what does this provision imply? What exactly is deposit taking in ordinance course of business? Is it to exclude deposits or loans taken for business purposes? Notably, almost all the so-called deposits that were taken during the Chit funds scam in West Bengal were apparently for some business purpose, though they were effectively nothing but money-for-money transactions. While the intent of this exception may be quell fears expressed across the country by small businesses that even taking of loans for business purposes will be barred, the provision does not jell with the meaning of excluded deposits which gives very specific carve-outs.
Also, one may potentially argue that deposit-taking itself may be a business. Or, deposits sourced may be used for money-lending business, which is also a deposit taken in ordinary course of business.
Basically, the insertion of this provision in section 41 may completely rob the statute of its intent and impact, even though it has an understandable purpose.
Please see our write ups on the Ordinance
- http://vinodkothari.com/2019/02/presentation-on-banning-of-unregulated-deposit-schemes/
- http://vinodkothari.com/2019/02/menace-of-illicit-deposit-schemes-pinned-down/
- https://www.moneylife.in/article/a-nip-in-the-bud-ordinance-bans-unregulated-deposits/56428.html
- https://www.moneylife.in/article/banning-unregulated-deposits-schemes-big-concern-for-small-businesses/56448.html
[1] http://164.100.47.4/BillsTexts/LSBillTexts/PassedLoksabha/182C_2019_LS_Eng.pdf
[2]https://www.prsindia.org/sites/default/files/bill_files/Banning%20of%20Unregulated%20Deposit%20Schemes%20Ordinance%2C%202019.pdf
Highlights of Companies (Amendment) Bill, 2019
/1 Comment/in Amendments to the Companies Act 2013, Companies Act 2013, Corporate Laws, MCA /by Vinod Kothari Consultantsby Vinod Kothari
The Companies (Amendment) Bill, 2019 has been placed before the Parliament[1] on 25th July, 2019. While the Bill, 2019 is largely to enact into Parliamentary law the provisions already promulgated by way of Presidential Ordinance, the Bill also brings some interesting changes.
The key feature of the Bill is to replace the existing system of judicial prosecution for offences by a departmental process of imposition of penalties. As a result, while the monetary burden on companies may go up, but offenders will not be having to face criminal courts and the stigma attached with the same.
Some of the other highlights of the changes are as follows:
Dematerialisation of securities may now be enforced against private companies too
It is notable that amendments were made by the Companies (Amendment) Act, 2017 effective from 10th September, 2018 effective from 2nd October, 2018, whereby all public unlisted companies were required to ensure that the issue and transfer of securities shall henceforth be done in dematerialised mode only. This provision alone had brought about major cleansing of the system, as in lots of cases, shareholding records included men of straw.
However, the reality of India’s corporate sector is private companies, constituting roughly 90% of the total number of incorporated companies.
The provision of section 29 is now being extended to all companies, public and private. This means, that the Govt may now mandate dematerialisation for shares of private companies too. Whether this requirement will be made applicable only for new issues of capital by private companies, or will require all existing shares also to be dematerialised, remains to be seen, but if it is the latter, the impact of this will be no lesser than “demonetisation-2” at least for the corporate sector. Evidently, all shareholders of all private companies will have to come within the system by getting their holdings dematerliaised.
CSR is now mandatory, and unspent amounts will go to PM’s Funds
When the provision for corporate social responsibility was introduced by Companies Act 2013, the-then minister Sachin Pilot went public to say, the provision will follow what is globally known as “comply or explain” (COREX). That is, companies will not be mandated to spend on CSR – the board report will only give reasons for not spending.
Notwithstanding the above, over the last few months, registry offices have sent show-cause notices to thousands of companies for not spending as required, disregarding the so-called reasons given in the Board report.
Now, the rigour being added takes CSR spending to a completely different level:
- If companies are not able to spend the targeted amount, then they are required to contribute the unspent money to the Funds mentioned in Scheduled VII, for example, PM’s National Relief Fund.
- Companies may retain amounts only to the extent required for on-going projects. There will be rule-making for what are eligible on-going projects. Even in case of such on-going projects, the amount required will be put into a special account within 30 days from the end of the financial year, from where it must be spent within the next 3 years, and if not spent, will once again be transferable to the Funds mentioned in Schedule VII.
- Failure to comply with the provisions makes the company liable to a fine, but very seriously, officers of the company will be liable to be imprisoned for upto 3 years, or pay a fine extending to Rs 5 lacs. Given the fact that the major focus of the Injecti Srinivas Committee Report, which the Ordinance tried to implement, was to restrict custodial punishment only to most grave offences involving public interest, this by itself is an outlier.
Unfit and improper persons not to manage companies
The concept of undesirable persons managing companies was there in sections 388B to 388E of the Companies Act, 1956. These sections were dropped by the recommendations of the JJ Irani Committee. Similar provisions are now making a comeback, by insertions in sections 241 to 243 of the Act. These insertions obviously seem a reaction to the recent spate of corporate scandals particularly in the financial sector. Provisions smacking similar were recently added in the RBI Act by the Finance Bill.
The amendment in section 241 empowers the Central Govt to move a matter before the NCLT against managerial personnel on several grounds. The grounds themselves are fairly broadly worded, and have substantial amplitude to allow the Central Govt to substantiate its case. Included in the grounds are matters like fraud, misfeasance, persistent negligence, default in carrying out
obligations and functions under the law, breach of trust. While these are still criminal or quasi-criminal charges, the notable one is not conducting the business of the company on “sound business principles or prudent commercial practices”. Going by this, in case of every failed business model, at least in hindsight, one may allege the persons in charge of the management were unfit and improper.
Once the NCLT has passed an order against such managerial person, such person shall not hold as a director, or “any other office connected with the conduct and management of the affairs of any
Company”. This would mean the indicted person has to mandatorily take a gardening leave of 5 years!
Disgorgement of properties in case of corporate frauds
In case of corporate frauds revealed by investigation by SFIO, the Govt may make an application to NCLT for passing appropriate orders for disgorgement of profits or assets of an officer or person or entity which has obtained undue benefit.
[1] https://www.prsindia.org/sites/default/files/bill_files/Companies%20%28Amendment%29%20Bill%2C%202019_0.pdf
Employee share based payments: Understanding the taxation aspects
/1 Comment/in Companies Act 2013, Direct Taxes, Taxation /by Vinod Kothari ConsultantsBy Rahul Maharshi (rahul@vinodkothari.com), (finserv@vinodkothari.com)
Introduction
Employee share based payments (ESBPs) are an effective way of incentivising employees. ESBPs work as a two way growth strategy for both company as well as the employees. On one hand, it helps the employees to participate in the growth of the entity and in turn reap out the benefits from it, on the other hand it helps the entity to boost the growth rate and align the vision of the employees with that of the company. The ESBPs work as a catalyst for the employee growth as well as the growth of the company.
The theme of this article revolves around the taxation aspects of different types of ESBPs, but before we proceed further, let us have a quick understanding about the different types of ESBPs. Read more →