SEBI proposed amendments in PIT Regulation to incentivize Informants…

By Dibisha Mishra (dibisha@vinodkothari.com)

corplaw@vinodkothari.com

Introduction

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.

Features

The salient features of the proposed Informant Mechanism shall be as follows:

  1. Voluntary Information Disclosure Form where information can be reported.
  2. Disclosure on source of information: The information should be original and not sourced from any other person
  3. Office of Informant Protection(OIP): A dedicated department separate from investigation and inspection wings.
  4. Submission of Information: either by himself or through a practicing advocate where the informant decides to report unanimously.
  5. Confidentiality of Informant shall be maintained throughout the proceedings, if any, initiated by SEBI unless evidence of such informant is required such proceedings.
  6. 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.
  7. Reporting of the functioning of OIP on an annual basis to SEBI.
  8. A dedicated hotline to guide persons on how to file information.
  9. 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.
  10. Provision for amnesty.

Few downsides

  1. 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.
  2. 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.
  3. Tracking System: The policy mentions no such system of tracking by the informants regarding the status of information by them.

Conclusion

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.

[i] https://www.sebi.gov.in/reports/reports/jun-2019/discussion-paper-on-amendment-to-the-sebi-prohibition-of-insider-trading-regulations-2015-to-provision-for-an-informant-mechanism_43237.html

SEBI’s proposed buyback rules for leverage limits: to what extent practical? Rules impose low leverage limits for NBFCs and HFCs

 

Pammy Jaiswal

Vinod Kothari and Company

corplaw@vinodkothari.com

Background

As the regulators eye the performance of business houses at the group level for getting a helicopter view of their economic position, many changes have been brought in this direction. Some of which include the requirement of preparing the consolidated results on a quarterly basis, consideration of profitability and other financial statements on a consolidated basis for the purpose of coming up with an IPO under SEBI ICDR Regulations, 2018 and recommendations of the Kotak Committee for making like changes under the Listing Regulations.

SEBI, going forward in the same direction has issued its discussion paper on the proposed changes in the buy-back conditions on 22nd May, 2019[1].  While one of the proposed changes in terms of computing the buy-back size is on the logical side, the other change on taking the debt to equity ratio on a consolidated basis for certain categories of listed companies is seemingly impractical. This note shall cover the brief of the proposed changes and certain extent of critical analysis on the same.

Buy-Back Conditions

Both section 68 of the Companies Act, 2013 (‘Act, 2013’) as well as SEBI Buy-Back Regulations spell out the conditions for buy-back, some of which are as follows:

  • Authorisation in the Articles of Association and the shares subject to buy-back are fully paid-up.
  • Source of funds for buy-back – Three sources are laid i.e. free reserves, securities premium account and proceeds of the issue of any shares or other specified securities.
  • Buy-back offer size – 25% of the paid-up share capital of the company.
  • Buy-back size – Upto 10% of the paid-up share capital and free reserves with the approval of the Board and upto 25% of the paid-up share capital and free reserves with the approval of the members of the company.
  • Debt to equity ratio post buy-back is not more than 2:1 (except for government companies which are NBFCs and HFCs and can have the ratio not exceeding 6:1).
  • Other conditions as mentioned under the SEBI Buy-Back Regulations, 2018 for listed companies going for buy-back.

Both the legislations till now require that these conditions are met on a standalone basis. However, the discussion paper suggests that considering the threshold on standalone basis may not be giving the correct and complete picture of the parent entity which is going got buy-back of its securities.

 

Accordingly, the said paper recommends certain changes which are briefly analysed below.

 

SEBI’s move for conservative computation of thresholds under buy-back

 

Sr. No. Existing Requirement Proposed change Rationale Our comments
1. Board can approve buy-back to the extent of utilising 10% of the paid-up equity capital and free reserves The threshold of 10%  to be considered on conservative basis (both standalone as well as consolidated basis, whichever is lower) ·      Complete overview of group as a whole;

·      Consolidated financials present the economic position of the entity as a whole along with its potential to serve its obligations.

 

Considering the lower of the consolidated and the standalone figures should be absolutely fine as no one will be able to take any advantage out of it, however, the change may adversely affect the buy-back size of the listed company.

 

Especially where the subsidiaries of the listed company have negative net worth, there the limits may substantially go down.

2. Members can approve buy-back to the extent of utilising 25% of the paid-up equity capital and free reserves The threshold of 25%  to be considered on conservative basis (both standalone as well as consolidated basis, whichever is lower) Same as above. Same as above.
3. Post buy-back debt to equity capital to be 2:1 (the debt to capital and free reserves ratio shall be 6:1 for government companies within the meaning of clause (45) of section 2 of the Act, 2013 which carry on Non-Banking Finance Institution activities and Housing Finance activities.) Post buy-back debt to equity capital of 2:1 (the debt to capital and free reserves ratio shall be 6:1 for government companies within the meaning of clause (45) of section 2 of the Act, 2013 which carry on Non-Banking Finance Institution activities and Housing Finance activities) shall be considered on consolidated basis, excluding subsidiaries only if the subsidiaries are regulated and have issuances with AAA ratings

 

Such subsidiaries should have debt to equity ratio of not more than 5:1 on standalone basis

Considering the situation where the subsidiary of the parent entity has large amount of debt in its books, it is not judicious to exclude such debt while computing the debt to equity ratio for the purpose of calculating the buy-back size. This change is not achievable at all considering the following:

·   NBFCs and HFCs are capital intensive;

·   NHB allows 16 times leverage to HFCs;

·   No NBFCs are running at the leverage of 2:1;

·   Even if the parent entity has surplus capital and the same is put in the subsidiary which is capital intensive, the proposition will be flawed; and

·   Considering the inverse relation between weighted average cost of capital (WACC) and leverage, if the funds are given to the subsidiary, the WACC goes up and the leverage comes down.

 

While the above changes have been discussed in the paper, it actually calls for change in the legislation itself which when made effective, will give way to these changes. Till such time, the existing framework shall continue to rule the buy-back exercise.

Whether the aforesaid suggestion is for all listed companies?

Para 4.4 of the discussion paper states that the Primary Markets Advisory Committee (PMAC) of SEBI proposed the changes for those companies which have NBFCs and HFCs as their subsidiaries. This implies that the proposed changes are with the intent of restraining the buy-back exercise for those parent companies which have subsidiaries engaged in the business of financing and therefore, have large exposure on their assets.

Further, this implies that the listed companies whose subsidiaries do not comprise of finance companies may still continue with their practice of considering the threshold at standalone basis unless otherwise mentioned.

Conclusion

While the intent of these changes are aimed to make the buy-back conditions more conservative with an overview on the economic status of the entity on a group level, however, it fails to understand the need for a higher leverage for capital intensive entities.

 

[1] https://www.sebi.gov.in/reports/reports/may-2019/discussion-paper-on-review-of-buy-back-of-securities_43054.html

Anomaly relating to much awaited e-form DPT-3

By CS Smriti Wadehra | corplaw@vinodkothari.com

 

Introduction

MCA on January 22, 2019 had issued a Notification[1] 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
  • both

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[2] 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:

  1. 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;
  2. 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;
  3. 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.

Conclusion

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


[2]
http://www.mca.gov.in/Ministry/pdf/CompaniesAcceptanceDepositsSecAmendRules_01052019.pdf[1] http://www.mca.gov.in/Ministry/pdf/AcceptanceDepositsAmendmentRule_22012019.pdf

LIABILITY OF GUARANTOR AND PRINCIPAL DEBTOR IS CO-EXTENSIVE AND NOT IN ALTERNATIVE

By Richa Saraf (legal@vinodkothari.com)

In the case of Sanjeev Shriya v. State Bank of India & Ors.[1], the Hon’ble Allahabad High Court has barred parallel proceedings in Debt Recovery Tribunal (DRT) and National Company Law Tribunal (NCLT). Below we discuss the implications and analyse the judgment:

Read more

Who Can File an Affidavit?

By Megha Mittal (resolution@vinodkothari.com)

Beware before you swear!

 

What is an Affidavit?

“Affidavit” is a term used very frequently in the common-parlance; however, the consequences it carries are highly underestimated. People file affidavits being unaware of what its repercussions might be and also unaware of the fact whether they are at all competent to make the affidavit. Before analysing who can file an affidavit, it is important to understand the duty bestowed upon a person providing affidavit. Even before that let us first understand what an affidavit is.

An affidavit is sworn, written statement, confirmed by oath or affirmation, voluntarily made by an affiant or deponent, administered or notarised by a person authorised to do so by law.

We shall now look through the different components of the different components of an affidavit:

  • Written statementan affidavit must be a written one. Oral statements sworn before law do not tantamount to affidavit. An affidavit may be used as an evidence before law and thus, must be written.
  • Oath or affirmationan oath or affirmation is a solemn promise regarding one’s actions, past, present or future.
  • Voluntarilythe most significant consequence of an affidavit is that it has a binding effect on the person making such affidavit, and thus, an affidavit must be voluntarily and cautiously made. If any aggrieved person proves that the affidavit was made as a result of coercion or undue pressure, it shall not be valid.
  • Affiant or deponent”- an affiant or a deponent is the person who makes an affidavit under oath.
  • Notarised lastly, an affidavit must be compulsorily notarised, i.e. the genuinity of the affidavit is to be certified by a notary public appointed by the state or the central government.

Read more

Interim Compensation to the Payee of the Dishonoured Cheque

By Shreya (legal@vinodkothari.com)

Background:

Negotiable Instruments are the principal instruments for fulfilling commercial obligations and they play a very significant role in the modern trade and business community. Law relating to negotiable instruments is provided in the Negotiable Instruments Act, 1881(“the Act”) as amended from time to time.

Dishonour of cheque due to insufficiency of funds was made a penal offence by the insertion of Chapter XVII in the Act by the Banking Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988. The object of criminalising dishonour of cheque was to regulate the expanding trade, commerce, business and industrial activities, to safeguard the interests of the creditors as well as to ensure greater vigilance in the matters of finance.

The Negotiable Instruments (Amendment) Act, 2017: Objects and Reasons

The Lok Sabha has passed the Negotiable Instruments (Amendment) Act, 2017 (“the Amendment Act”) on July 23, 2018. It shall come into effect on the date appointed by the Central Government by way of a notification in the Official Gazette. The amendment has inserted two provisions, sections 143A and 148 in relation to cheque dishonour cases which empower the trial court and the appellate court, as the case maybe, to order payment of interim compensation during the trial and deposit of certain minimum sum in an appeal by the drawer of cheque against conviction.

In the Statement of Objects and Reasons appended to the Amendment Bill, it was stated that “injustice is caused to the payee of a dishonoured cheque who has to spend considerable time and resources in court proceedings to realise the value of the cheque” on account of “delay tactics of unscrupulous drawers of dishonoured cheques due to easy filing of appeals and obtaining stay on proceedings.” The Amendment Act, thus, seeks to provide relief to payees of dishonoured cheques who get caught up in lengthy litigations and to discourage frivolous and unnecessary litigation.

Salient Features of the Amendment Act:

Under the newly inserted section 143A in the Act, the trial Court has power to order payment of interim compensation by the drawer of the cheque to the complainant. Such payment can be ordered in both summary trial and a summons case (as provided under section 143 of the Act) where the accused drawer pleads not guilty to the charge made in the complaint. In other cases, it can be ordered upon framing of charges. The section has made the payment of interim compensation subject to following conditions:

  1. The interim compensation shall not exceed twenty percent of the amount of the cheque.
  2. The interim compensation is to be paid within sixty days from the date of the order of payment. A further extension of maximum thirty days can be granted if the drawer of the cheque shows sufficient cause.
  3. The interim compensation is to be recovered in accordance with section 421 of the Code of Criminal Procedure, 1973 (“the CrPC”). Section 421 prescribes two modes of recovery of fine- (a) attachment and sale of any movable property of the drawer, (b) recovery as arrears of land revenue from the movable or immovable property of the drawer by way of a warrant issued to the Collector of the concerned district.
  4. If the drawer of the cheque is acquitted, the complainant shall be directed to repay to the drawer the amount of interim compensation along with interest at the bank rate as published by the Reserve Bank of India, prevalent at the beginning of the relevant financial year. The repayment has to be made within sixty days of the date of order of acquittal subject to a further extension of not more than thirty days if the complainant shows sufficient cause for delay.

While Section 143A confers power on the trial Court to order payment of interim compensation, Section 148 empowers the Appellate court to order the drawer to deposit such sum which shall be a minimum of twenty per cent of the fine or compensation awarded by the trial Court. Such deposit is in addition to the interim compensation already paid pursuant to section 143 A. The deposit is to be made subject to the following procedure and conditions laid down in the section:

  1. The amount is to be deposited within sixty days from the date of the order of payment. A further extension of maximum thirty days can be granted if the appellant shows sufficient cause.
  2. The amount deposited may be directed to be released to the complainant at any time during the pendency of the appeal.
  3. If the appellant is acquitted, the complainant shall be directed to repay to the drawer the amount of the deposit along with interest at the bank rate as published by the Reserve Bank of India, prevalent at the beginning of the relevant financial year. The repayment has to be made within sixty days of the date of order of acquittal subject to a further extension of not more than thirty days if the complainant shows sufficient cause for delay.

Analysis:

As already mentioned, dishonour of cheque is a penal offence under section 138 of the Act and it attaches criminal liability to the drawer of the dishonoured cheque. The traditional view is that the object of a criminal proceeding is ‘deterrence’ whereby punishment is imposed on the accused, through fine or imprisonment or both, whereas, the award of compensation or damages is considered to be a characteristic feature of a civil proceeding.

In this regard, reference must be drawn to Section 357 of the CrPC which empowers the Criminal Courts to order payment of compensation.

“357. Order to pay compensation.—(1) When a Court imposes a sentence of fine or a sentence (including a sentence of death) of which fine forms a part, the Court may, when passing judgment, order the whole or any part of the fine recovered to be applied –

XX

(b) in the payment to any person of compensation for any loss or injury caused by the offence, when compensation is, in the opinion of the Court, recoverable by such person in a Civil Court;

XX”

On this issue, the Supreme Court of India in the case of R. Vijayan v. Baby[1] observed that:

“Though a complaint under section 138 of the Act is in regard to criminal liability for the offence of dishonouring the cheque and not for the recovery of the cheque amount, (which strictly speaking, has to be enforced by a civil suit), in practice once the criminal complaint is lodged under section 138 of the Act, a civil suit is seldom filed to recover the amount of the cheque. This is because of the provision enabling the court to levy a fine linked to the cheque amount and the usual direction in such cases is for payment as compensation, the cheque amount, as loss incurred by the complainant on account of dishonour of cheque, under section 357 (1)(b) of the Code and the provision for compounding the offences under section 138 of the Act. Most of the cases (except those where liability is denied) get compounded at one stage or the other by payment of the cheque amount with or without interest. Even where the offence is not compounded, the courts tend to direct payment of compensation equal to the cheque amount (or even something more towards interest) by levying a fine commensurate with the cheque amount.”

The Court further pointed out that the provisions of Chapter XVII of the Act strongly lean towards grant of reimbursement of the loss by way of compensation. The trial courts should, unless there are special circumstances, in all cases of conviction, uniformly exercise the power to levy fine upto twice the cheque amount (keeping in view the cheque amount and the simple interest thereon at 9% per annum as the reasonable quantum of loss) and direct payment of such amount as compensation.

It appears from the language of section 357(1)(b) of the CrPC as well as the above ruling that the intent behind awarding compensation to the payee of dishonoured cheques in a criminal proceeding instituted under section 138 is to facilitate the payee to recover the

amount of cheque without having to initiate a separate recovery suit in a civil court so that matter arising out of the same cause of action is settled in the same court.

In line with the aforesaid, the Amendment Act now expressly provides for compensatory and restitutive provisions in addition to the traditional punitive provisions as regards the dishonour of cheques.

At this juncture, it is relevant to note that section 25(5) of the Payment and Settlement Systems Act, 2007 expressly provides for applicability of Chapter XVII of the Negotiable Instruments Act, 1881 to dishonour of electronic funds transfer. The section makes the dishonour of electronic funds transfer an offence punishable with imprisonment or with fine or both, similar to the dishonour of a cheque under the Negotiable Instruments Act. The Reserve Bank of India vide its circular no. DOC/2011-12/191 DPSS. O.PD.No 497/02.12.004/2011-12 dated September 21, 2011 had clarified that section 25 of the Payment and Settlement Systems Act, 2007 accords the same rights and remedies to the payee (beneficiary) against dishonour of electronic funds transfer instructions for insufficiency of funds in the account of the payer (remitter), as are available to the payee under section 138 of the Negotiable Instruments Act, 1881.

Thus, the payees of dishonoured electronic funds transfer shall also be entitled to the interim compensation on par with the payees of dishonoured cheques.

The Amendment Act, thus, is a welcome development for the payees of dishonoured cheques as well as dishonoured electronic funds transfer, in particular the banks and financial institutions as they will be greatly facilitated in recovery of amount by way of proceedings under section 138 of the Act. Further, this will allow them to continue to extend financing to the productive sectors of the economy leading to overall development of trade and commerce.

Concluding Remarks:

The Amendment Act is, undoubtedly, a positive step towards ensuring the credibility of cheques. However, the Amendment Act is not without its fare share of criticism. Some people are of the view that the Act is still not stringent enough to effectively deter the defaulting drawers of the cheques. As such, harsher penalties should be imposed on the repeat offenders in the form of increased fine or prohibition on issuing cheques for a specified period. Also, express provision should be inserted for expeditious trial of the cheque bouncing cases within the prescribed time period. Nonetheless, the Amendment Act will go a long way in ensuring relief to the payee of the dishonoured cheques.


[1] R. Vijayan v. Baby, (2012) 1 SCC 260 (Read judgement at: https://indiankanoon.org/doc/635335/).