Evolution of concept of related parties and related party transactions
-Team Vinod Kothari and Company | corplaw@vinodkothari.com
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MCA rationalizes 52 ROC e-Forms for V3 portal
Directors to declare on personal disqualifications too in DIR-8
– Prapti Kanakia, Manager | prapti@vinodkothari.com
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CSR Rules tweaked to rationalize committee constitution, implementing agencies etc
– Nitu Poddar, Partner | Lovish Jain, Executive | corplaw@vinodkothari.com
MCA vide its notification dated September 20, 2022 has made amendments in the Companies (Corporate Social Responsibility Policy) Rules, 2014 (“Rules”). The said amendment seeks to do away with the redundant requirements in Rule 3(2) of making CSR expenditure and other compliances even after the companies cease to be covered within the thresholds under section 135(1), provide for continuation of CSR committee in case of amount lying in the unspent CSR account, amend the scope of implementing agencies and in the ceiling of expenditure towards impact assessment as well as some changes in the annual report on CSR.
Read more →Investments from neighbouring countries under stringent scan of GoI
– Prapti Kanakia | corplaw@vinodkothari.com
Recently, the Ministry of Corporate Affairs (MCA) has implemented a series of amendments which relates to investments in India by foreign nationals or entities incorporated in a country which shares a land border with India. These amendments are in tandem with the amendment made by the Department for Promotion of Industry and Internal Trade (DPIIT) in FDI Policy and by the Ministry of Finance, Department of Economic Affairs, in FEM (Non Debt Instruments) Rules, 2019 (NDI Rules).
DPIIT amended the FDI policy vide press note no. 3 dated 17 April, 2020 to curb the hostile takeovers of Indian Companies by nationals/entities of neighbouring countries. Erstwhile, only a citizen of Bangladesh & Pakistan or an entity incorporated in Bangladesh & Pakistan were required to take government approval for investing in India. Pursuant to amendment, any entity incorporated in a country, citizen or beneficial owner of a country, which shares land border with India, needs to obtain government approval for investing in the equity instrument of the Indian Company. Thus, nationals/entities from Pakistan, Afghanistan, China, Bhutan, Nepal, Myanmar and Bangladesh can invest in India only under approval route.
Read more →Foreign nationals to comply with stringent MCA norms
– Team Corplaw | corplaw@vinodkothari.com
Our write-ups on corporate laws: https://vinodkothari.com/category/corporate-laws/
Utilisation of accumulated surplus by section 8 companies
-Can surrogate means be used to relegate funds or benefits to shareholders
Pammy Jaiswal | Partner | Vinod Kothari and Company
Shraddha Shivani | Executive | Vinod Kothari and Company
Background
Section 8 of the Companies Act, 2013 (‘CA’) provides for the formation of companies with specific objects. Since the section revolves around incorporation of companies with charitable or some other specified welfare objectives, it gives an impression that these companies do not work to earn financial gains for their shareholders. This impression becomes evident since Section 8 companies are commonly referred to as ‘not-for-profit’ companies which further substantiates this understanding and adds to the confusion. They may make profits, as indeed, they very often do; however, the profit necessarily gets redeployed to carry the very same objects for which the company was formed, and cannot be relegated to the shareholders.
In fact, earning profits is not just permitted but is also essential for their continued existence and organic growth of its affairs. Most such companies do not borrow; hence, they carry their activities either through corpus contributions or through retained profits. Thus, the restrictions under CA are not on earning profits but on the distribution of the same to its shareholders.
The most common way for a company to distribute profits to its shareholders is by way of payment of dividend. This is explicitly barred in case of a Section 8 company. Having said that, these companies may also come across a situation where they do not foresee any immediate application of their accumulated profits and therefore, may look out for ways to utilise it for some other purpose. The management running these companies, potentially representing shareholders, may not be necessarily driven by avarice when they intend to use the funds other than for the purpose for which the company was formed.
Read more →Board Observer: A silent observer or a game changer?
-Pammy Jaiswal and Neha Malu | corplaw@vinodkothari.com
Background
Getting an investor for one’s business is a crucial stage for any company and so no company would want to lose the opportunity to crack a deal with the investor even if it has to give away certain rights and powers to the said investor. Looking at the Indian statistics, it has been observed that Private equity (PE) and venture capital (VC) investments have been on a growing trend and they stood at US$ 4.4 billion across 99 deals in December 2021. As the investors decide to put in funds, they look out for having such rights so that they are updated about every major decision being taken in the investee. Majority of the decisions affecting the day-to-day operations are usually taken at the board level. Therefore, it has been observed that generally to strengthen the investor’s confidence in the operations and decision making, a “Board Observer” is appointed by such investor pursuant to an agreement who carries certain rights and obligations.
The Board Observer is a representative of the investor who is expected to observe the board proceedings without being formally appointed as a director and has no voting rights in the board deliberations. Internationally, the said concept is much more popular and has also been a point of litigation to decide on the rights and obligations of such Board Observers.
In this write-up, we have tried to deal with the important aspects relating to the concept of Board Observer so as to determine whether he is just a “silent observer” on the board of the investee company or a “game changer” in the real sense.
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