Foreign Entities getting into Payment Systems in India

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By Vinita Nair, Vishes Kothari, Rajeev Jhawar & Simran Jalan

(finserv@vinodkothari.com)

India is one of the most exciting markets for fintech startups. Several overseas entities, having already established businesses overseas, want to set up mobile wallets or payments systems in India. This makes them run into two laws, first by virtue of being an overseas entity desirous of moving funds in some form or the other into India, and second because it is entering the payment and settlement systems  space. These bring complexities of foreign direct investment covered by Foreign Exchange Management Act, 1999, and nuances of skeletal, regulation-based law under Payment and Settlement Systems Act, 2007. This article intends to provide an easy-to-comprehend guide to the applicable regulations for overseas entities getting into payment systems in India. Read more →

Senior Management Official as Significant Beneficial Owner

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Revised guidelines for companies to facilitate the claimant’s refund by IEPF Authority

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By Nikita Snehil (corplaw@vinodkothari.com)

The Ministry of Corporate Affairs (‘MCA’) Vide its Notification[1] No. 07/05/2017-IEPFA, dated July 19, 2018 has revised and updated the guidelines for the company to facilitate the refund of the claims by IEPF Authority in light of the resubmission option provided in e-form IEPF-5.

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Disqualification Before The Deadline: Seemingly A Never Ending Debate!

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By Pammy Jaiswal, Partner & Smriti Wadehra, Assistant Manager

corplaw@vinodkothari.com

Background

While MCA has been on a spree to disqualify lakhs of directors on the Board of companies across the nation, the aggrieved directors have been knocking the doors of High Courts and Supreme Courts for getting some sort of relief in this regard.

It is interesting to note that the order passed by various High Courts and even Supreme Courts have clearly reflected the perplexity over interpreting the provisions of section 164 (2) of the Companies Act, 2013 (‘CA, 2013’) or section 274 (1) (g) of the erstwhile Companies Act, 1956 (‘Erstwhile Act’). In most of these judgements, one of the heated discussion has been to comment on the applicability of the provisions of section 164 even prior to the commencement of the said section.

In one of the recently decided writ petition filed by Bahgwan Das Dhananjaya Das against Union of India and RoC, Tamil Nadu[1], the Madras High Court has given rationale for not applying the provisions of section 164 (2) of the CA, 2013 with retrospective effect.

This write-up pin points the rationale behind the judgement of the Madras High Court and also discusses the counter view of the Apex Court in a similar matter.

Commencement of the provisions of section 164(2) of the CA, 2013

Birdies and Eagles Sports Technology Private Limited (the Company in question) had no operations and was dormant till 2012. It had filed its annual return and financial statements till the FY 2011-12 and not thereafter. Under the Erstwhile Act, private companies were exempted from section 274 (1) (g) and it was only on and after 1.04.2014 that the provisions of section 164 (2) of CA, 2013 was notified.

As rightly pointed out in the instant judgement, by virtue of the new section 164(2)(a) of the CA, 2013, the word ‘company’ was used instead of ‘public company’ that was used under the Erstwhile Act. Accordingly, where a private company fails to file its annual return or financial statements for three financial years, on or after the first day of commencement of section 164 (2), the directors on the board of such companies will also be disqualified. Therefore, the financial years that should be covered for determining the filing status under the said section are:

  1. 1st April, 2014 to 31st March, 2015
  2. 1st April, 2015 to 31st March, 2016
  3. 1st April, 2016 to 31st March, 2017

Having said so, it should also be noted that section 92 and section 137 provides a time frame of 60 and 30 days respectively for filing the annual return and financial statements respectively. In order to determine the failure of a private company under the said section, MCA should have waited for the filing period allowed by law to get over. In the instant case, MCA had issued the notice reflecting the names of disqualified directors on 08.09.2017 while the Company had time till 30.11.2017 for completing the filing requirements. Therefore, even though it was sine quo non to have failed filing requirement for three financial years for disqualification to take place, the disqualification happened before the deadline.

Additional time-period of 270 days

On the contrary, companies also had the liberty of filing the annual return or financial statements within a time period of additional 270 days as allowed under section 403 of the CA, 2013 which though have now been amended by virtue of Companies (Amendment) act, 2017.

In view of the same it has been rightly mentioned in the judgement that:

“…… the second respondent, on a wrong interpretation of Section 164(2)(a), has disqualified the petitioners even before the provision came into force.”

Article 20 of the Indian Constitution

Article 20 of the Indian Constitution deals with protection in respect of conviction for offences. It states the following:

(1) No person shall be convicted of any offence except for violation of the law in force at the time of the commission of the act charged as an offence, nor be subjected to a penalty greater than that which might have been inflicted under the law in force at the time of the commission of the offence

XX.”

The judgement clearly discusses that the act of the RoC, Tamil Nadu is against the principles of Article 20 of the Indian Constitution as applying the provisions retrospectively would attract penal provisions for the company and the directors for such period wherein the law in force at the time of commission/ omission of the offence was not treated as an offence at all. Further, it is a fundamental rule of law that no statute shall be construed to have a retrospective operation unless such a construction appears very clearly in the terms of the Act, or arises by necessary and distinct implication. Further also, in the matter of Govind Das and others v. Income Tax Officer and another[2], AIR 1977 SC 552, the Apex Court had ruled that retrospective operation should not be given to a statute so as to affect, alter or destroy an existing right or create a new liability or obligation unless that term of the statute expressly so provide or necessarily require it. Accordingly, the act of the RoC was unconstitutional and arbitrary.

MCA forgot its own clarification

MCA by virtue of its own circular dated 4.04.2014[3], had clarified that financial year prior to 01.04.2014 shall be governed by Erstwhile Act and those on or after 1.04.2014, shall be governed by CA, 2013. The extract of the said circular is as follows:

“Although the position in this behalf is quite clear, to make things absolutely clear it is hereby notified that the financial statements (and documents required to be attached thereto), auditors report and Board report in respect of financial years that commenced earlier than 1st April, 2014 shall be governed by the relevant provisions/ Schedules/ rules of the Companies Act, 1956 and that in respect of financial years commencing on or after 1st April, 2014, the provisions of the new Act shall apply.”

On reading of the aforesaid circular it was all the more clear that there is no provision in the CA, 2013 to disqualify the petitioner for the financial year 2013-14 for a period covered by the Erstwhile Act. Further, the Companies Act, 2013 ought to be read prospectively and cannot relate to occasions prior to its coming into force, failing which the said provision would become unconstitutional.

Definition of financial year

In the instant case it was submitted that although Section 274(1)(g) of the Erstwhile Act was brought into the statute with effect from 13.12.2000, that section had clearly stated that “three financial years commencing on and after the first day of April 1999”, whereas the Section 164(2)(a) of the CA, 2013 uses the words “for any continuous period of three financial years”. Therefore, one needs to look into the definition of financial year”. Section 2(41) defines a financial year to mean “in relation to any company or body corporate, means the period ending on the 31st day of March every year XX”. The definition also makes it quite explicit that the three financial years post the commencement of section 164 (2) of the CA, 2013 shall be the one ending as on 31st March, 2017.

Co-relation between strike off order and notice of disqualification

In the instant case, MCA issued a Show Cause Notice (‘SCN’) under section 248 of the Act, 2013 on 18.03.2017. Accordingly, the said Company was struck off by the MCA vide its gazetted notice dated 5.07.2017. The order also throws light on the relation between striking of and disqualification of director. The relevant extracts from the judgement is as follows:

“This apart, even the second respondent issuing a notice under Section 248(1) of the new Act for striking off the name of the company from the Register of Companies stating that the company has not been carrying on any business or operation for a period of two financial years, has got nothing to do with the disqualification under Section 164(2)(a), for the foremost reason that a company can be struck off when it has not been carrying on any business for a period of two financial years, whereas for disqualification, the criteria is three financial years. Quoting an example, it is pleaded that if the company has not been carrying on business for two financial years ending 31.3.2015 and 31.3.2016, after giving due notice, the company can be struck off, whereas a director cannot be disqualified because only two financial years have come to an end. But for the disqualification, there should be three financial years. In other words, it is pleaded that if the company is struck off after 31.3.2016 but before 31.3.2017, there would not be any disqualification, because, before the third financial year, the company has been struck off.”

Principles of natural justice

In the matter of A.K. Kraipak and others v. Union of India[4], AIR 1970 SC 150, it was held that the “rules of natural justice operate in areas not covered by  any  law validly made, that  is,  they  do not supplant  the law of the land but supplement it.” The instant case wherein petitioners have been disqualified does not affects the directorship position of such director in the said struck off companies but also has far reaching impact. By virtue of the provisions, such director is forced to vacate his office as a director from all other companies where the offence has not taken place. Therefore, the principles of natural justice ought to have been followed so far as their continuance in other company which have followed the provisions of the CA, 2013.

Further, in the matter of Dharampal Sathyapal Limited v. Deputy Commissioner of Central Excise and others[5], (2015) 8 SCC 519, the Apex Court held that the show cause notice and personal hearing is necessary before saddling an assessee with additional demand.

Also referring to the case of Maneka Gandhi v. Union of India[6], (1978) 2 SCC 248, it was submitted that the act of the RoC, Tamil Nadu in disqualifying the directors without even providing them an opportunity of being hear is absolutely unreasonable and against the principles of natural justice.

Respondents only submission: Condonation Schemes

With a view to enable and provide an opportunity  file various pending documents and avoid penal action under the CA, 2013, MCA had issued the General Circular No.34/14 on 12.8.2014 with the introduction of Company Law Settlement Scheme, 2014 (CLSS-2014).

Further, the Respondents also mentioned that the Ministry had issued the Condonation of Delay Scheme 2018 to provide yet another opportunity to the defaulting companies and the same should be appreciated

It further stated that Section 164(2)(a) have two limbs, the words “no person who is or has been director of a company” which are used in the present continuous and present perfect continuous form, respectively and the words “has not filed financial statements or annual returns for any continuous period of three years” which are used in present perfect tense.

Therefore, this Court does not have any jurisdiction to undo the disqualification which had occurred on account of operation of law.

Intervention of the Supreme Court by putting a Stay Order on a similar case

While the Madras High Court was very clear in pronouncing its order for prospective application of section 164 (2) of the CA, 2013, in one of the similar writ petition filed by Shailendrajit Charanjit Rai & anr against the Registrar of Companies[7], Maharashtra, the Bombay  High Court also, had put a stay on the notice of disqualification issued by RoC, Mumbai

In the said matter, petitioners were directed to take immediate steps in consonance with the provisions under Section 248(2) of the said Act, 2013 and under the CODS­ 2018. The Bombay High Court had directed the RoC to accept physical documents of these struck-off companies and treat them as applications for voluntary striking off. This would essentially mean that the directors of these companies, who had been disqualified by the MCA, would no longer be considered disqualified till the date allowed by the High Court.

In supersession of the order of the Bombay High Court, the Apex Court on a Special Leave Petition filed by the RoC, Maharashtra, on 6th August, 2018 passed the stay order[8] on the order of Bombay High Court, thereby nullifying the stay order of the Bombay High Court and making the petitioners disqualified again from the date of notice of disqualification.\

Conclusion

While the Supreme Court had put a stay on the order, it has not mentioned any grounds for putting the stay. It seems that the Apex Court will transfer these cases to itself. Whatever may the call be, the situation is back to square one after continuous rulings on the subject matter and there seems to be no relief to the directors of the private companies.

 

[1] http://judis.nic.in/hcs/content.asp [Order can be seen at Judis]

[2] https://indiankanoon.org/doc/762617/

[3] http://www.mca.gov.in/Ministry/pdf/General_Circular_8_2014.pdf

[4] https://indiankanoon.org/doc/639803/

[5] https://indiankanoon.org/doc/159622873/

[6] https://indiankanoon.org/doc/1766147/

[7] http://www.amitadesai.com/uploads/Bombay%20High%20Court%20Order%20for%20CODS.pdf

[8] https://www.sci.gov.in/supremecourt/2018/23101/23101_2018_Order_06-Aug-2018.pdf

Revised, stringent private placement framework becomes effective: a step-by-step guide to compliance

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CS Vinita Nair, Partner, Vinod Kothari & Company

corplaw@vinodkothari.com

 

Substitution of Section 42 was one of the major amendments proposed under Companies (Amendment) Act, 2017. MCA on August 7, 2018 enforced Section 10 of Companies (Amendment) Act, 2017 amending Section 42 of Companies Act, 2013 (‘Act, 2013’) with effect from 7th August, 2018.

MCA amended Companies (Prospectus and Allotment of Securities) Rules, 2014 (‘PAS Rules’) to substitute Rule 14 dealing with private placement with effect from 7th August, 2018. Comparison/ mapping of Rule 14 of PAS Rules can be read here.

This article provides the revised procedure for private placement under Act, 2013 in the light of aforesaid amendments:

Phase 1: Prior to issuance of Private Placement Offer cum Application Letter (PPOAL)

  1. Passing of Board resolution under Section 179 (3) (c) for issue of securities;
  2. Delegating the power in relation to identifying persons, making of offer addressed to such identified persons, distributing of offer letter, allotment of securities to a Committee of Board or Committee of Management or officers of the Company;
  3. Filing of resolution passed under 1 and 2 with the Registrar pursuant to Section 117 (3) (g) of Act, 2013 in e-Form MGT 14;
    • Private companies are exempted from the requirement to file eform MGT-14 under Section 117 (3) (g) for resolutions passed under Section 179 vide  Notification dated 5th June, 2015. However, such private companies will also be required to file MGT-14 for board resolution passed for issue of securities under private placement.
  4. Seeking approval of shareholders by way of special resolution for issue of securities by way of private placement;
    • Separate approval of shareholders shall not be required in case of issuance of non-convertible debentures if the proposed amount to be raised is within the borrowing limits approved by the shareholders under Section 180 (1) (c) of the Act, 2013.
    • Explanatory statement to specify the matters provided in proviso to Rule 14 (1) reproduced hereunder:
      • Particulars of the offer including date of passing of Board resolution;
      • Kinds of securities offered and the price at which security is being offered;
      • Basis or justification for the price (including premium, if any) at which the offer or invitation is being made;
      • Name and address of valuer who performed valuation;
      • Amount which the company intends to raise by way of such securities;
      • Material terms of raising such securities, proposed time schedule, purposes or objects, contribution being made by the promoters or directors either as part of the offer or separately in furtherance of objects, principle terms of assets charged as securities.
  1. Filing of resolution passed under 4 above with the Registrar pursuant to Section 117 (3) (a) of Act, 2013 in e-Form MGT 14;
  2. Identification of persons to whom offer is required to be made by the Board or Committee/ officers delegated with the power by the Board;
  3. Ensuring the number of persons to whom the offer to be made does not exceed 200 (reckoned individually for each kind of security that is equity share, preference share or debenture) in a financial year.
    • Limit is not applicable in case of NBFCs, HFCs if they are complying with regulations made by the Reserve Bank of India or the National Housing Bank in respect of offer or invitation to be issued on private placement basis.
  4. Recording the names and addresses of the person in the record of private placement maintained in Form PAS-5;
  5. Opening of separate bank account for receipt of application money;

Phase 2: Issuance of PPOAL

  1. Sending of PPOAL in Form PAS 4 to the identified persons within 30 days of recording the name of such person. PPOAL shall not carry right of renunciation;
    • No fresh offer or invitation under this section shall be made unless the allotments with respect to any offer or invitation made earlier have been completed or that offer or invitation has been withdrawn or abandoned by the company.

Phase 3: Post issuance of PPOAL

  1. Every identified person willing to subscribe to the private placement issue shall apply in the private placement and application issued to such person along with subscription money paid either by cheque or demand draft or other banking channel and not by cash;
  2. Payment shall be made for subscription to securities from the bank account of the person subscribing to such securities in the separate bank account of the Company;
    • This shall not apply in case of issue of shares for consideration other than cash.
  3. Company shall keep record of the bank account from where such payment is received;

Phase 4: Allotment of securities

  1. Allotment shall be made by the Board or Committee/ officers delegated with the power;
  2. Return of allotment shall be filed in e-Form PAS -3 with the Registrar within 15 days of allotment;
  3. Company shall utilize the amount only after filing the return of allotment;
  4. Company shall issue share certificates/ debenture certificates within a period of two months from the date of allotment;
  5. Entry shall be made in the register of members/ debenture holders within 7 days of after the Board of Directors or its duly constituted committee approves the allotment of securities.