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Presentation on Significant Beneficial Owners (for companies & LLPs)

Team Corplaw | corplaw@vinodkothari.com

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Our article corner on SBO: https://vinodkothari.com/article-corner-on-sbos/

Online workshop on Significant Beneficial Owners: For Companies and LLPs

Click here to register for the workshop: https://forms.gle/3vdQjaLJY1Sgs4Ps5
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FAQs on mandatory demat of securities by private companies

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You may refer to our other FAQs on dematerialization of shares here and you may also refer to our Snippet, detailed article and YouTube Video

Designated Persons to reveal beneficial owners:Summary of the 27th October notification

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You may also refer to our detailed article and YouTube video on the same.

Share warrants under cloud – are companies not allowed to issue share warrants?

Share warrants are one of the widely used means to raise funds, particularly, in case of start-ups. MCA has recently notified the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023 (“Amendment Rules”) vide which Rule 9 has been amended to require mandatory conversion of the existing share warrants issued by public companies under the erstwhile Companies Act, 1956 (“Erstwhile Act”) into dematerialised form of securities. 

Following this amendment, a significant question comes up to be addressed is whether  public companies will  not  be allowed to issue share warrants altogether? We attempt to decode the implications of the present amendment in this write up.  

Actionables under the present amendment

The newly inserted sub-rule (2) and (3) to Rule 9 of the PAS Rules requires every unlisted company to – 

  1. File the details of existing share warrants with the ROC in form PAS-7 within 3 months from the commencement of the Amendment Rules, i.e., by 27th January 2024,
  2. Require bearers of the share warrants to surrender the same and issue dematerialised shares in the name of such bearer within 6 months from the commencement of the Amendment Rules, i.e., by 27th April, 2024, and
  3. Convert the unsurrendered share warrants into demat shares and transfer the same to IEPF

The company shall be required to issue notice for the bearers of share warrants in form PAS-8 on its website as well as two newspapers – in vernacular language, having wide circulation in the district and in English language having wide circulation in the state in which the registered office of the company is situated. 

Share warrants covered under the present amendment

In the context of the newly inserted sub-rule (2) of Rule 9, the term share warrants is to be interpreted in a much restricted sense. The provision refers to “share warrants prior to commencement of the Companies Act, 2013 and not converted into shares”, which implies share warrants issued under the Erstwhile Act only. In this regard, one may refer to section 114 of the Erstwhile  Act that allowed public companies to issue “bearer warrants” entitling the bearer of such warrants to the shares specified therein. The same was referred to as “share warrants” under the said Act, and the shares contained therein can be transferred through mere delivery of the warrant. 

The present amendment requires mandatory surrender of such “share warrants” in the form of “bearer warrants” against issuance of shares in dematerialised form. 

Permissibility for issuance of  share warrants under the Companies Act, 2013 (“Act”)? 

As mentioned above, the “share warrants” referred to under the Amendment Rules are limited to the bearer warrants issued in accordance with the Erstwhile Act, and do not extend to all share warrants which companies issue under the various provisions of law. 

In general context, share warrants are actually written options to subscribe to the shares of a company on pre-agreed terms at a future date. Such warrants are fairly common in the corporate world on account of the benefits associated with the same, and the present amendment cannot be said to rule out the possibility of issuance of such share warrants. Share warrants are directly or indirectly recognised under various provisions of law, for instance: 

  1. The definition of “securities” as provided for in section 2(h) of the Securities Contracts (Regulation) Act also includes “rights or interest in securities”. Share warrants are, in fact, a right to acquire securities at a future date, and therefore, well covered under the definition of securities
  1. The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 contains specific provisions with respect to issuance of share warrants.
  2. The Foreign Exchange Management (Non Debt Instruments) Rules, 2019 also refers to the term “share warrants” within the overall definition of “equity instruments” and contains specific provisions with respect to the same. 
  3. The Act refers to the conversion of “warrants” as a permissible mode for issuance of shares during the restricted period post buyback u/s 68(8) of the Act. It also contains references to employee “stock options”, which, by nature are equivalent to share warrants. 

While the Act does not mention at several places under it about share warrants, however, at few places, like the provisions under section 68 dealing with buy back of securities as well as  reference to employee “stock options”, which, by nature are equivalent to share warrants are given the Act.  

Therefore, there are no explicit provisions that prohibit the issuance of share warrants by unlisted companies, and the same, being a “security” can very well be issued by a company, whether listed or unlisted, in compliance with the applicable provisions of law to meet the required funding as well as investment objectives. 

Concluding remarks 

The Amendment Rules aim at the wiping out of the bearer share warrants, since the legal and beneficial ownership of the shares are non-traceable in such a case. However, that does not eliminate the concept of share warrants as a whole, that are issued to an identified set of persons, and follows a due procedure laid down in the law for transfer of such warrants. Although not expressly defined under the Act, the concept of share warrants is legally recognised under various laws and are being widely issued by Indian companies, whether listed or unlisted, including private companies. The current set of amendments will have no impact on the permissibility of issuing share warrants issued under the Act and other laws as mentioned hereinabove.

CSR spending in the Indian sports sector

-Shreya Salampuria | corplaw@vinodkothari.com

Background

Corporate social responsibility (CSR) spending in India, as is well known, is focused on certain statutorily recognised social activities, of which sports is one. Schedule VII, clause (vii) deals with activities related to “training to promote rural sports, nationally recognised sports, paralympic sports and olympic sports”.

Most of the attention under the schedule is taken away by contribution on activities connected with healthcare followed by education.

Khelo India, Kheloge toh Khiloge, an attempt to improve the performance of our vast country in sports, however, can we tap csr funds for the same?

When it comes to choosing or prioritizing the sports related activities, the outlook of the Indian companies cannot be said to be very impressive, however,  there has been an increment on the CSR spending under the sports sector.

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Gender Diversity in the Boardroom

-Mahak Agarwal | corplaw@vinodkothari.com

Diversity in the Boardroom, specifically gender diversity is in the limelight owing to the general awareness for breaking gender stereotypes and adopting a gender neutral board structure. While the Companies Act, 2013 and SEBI LODR Regulations have already taken their first steps towards implementing the same, considering the progress in global perspective, India still has a long way to go in increasing women participation in corporate boards  . This article discusses the concept of Board diversity, specifically  gender diversity,  and the ways in which Indian corporate laws could take their next step in achieving a gender-diversified Board.

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Understanding CSR for NGO

– Pammy Jaiswal, Partner | corplaw@vinodkothari.com

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Succession planning: failing to plan is planning to fail

-Anushka Vohra | Manager | anushka@vinodkothari.com

The article was also published in the CRA E-Bulletin and can be viewed here

Background

Passing the torch, lighting the way – an expression that can be used to refer to succession planning. Be it a household, business organization or institution, succession planning is needed everywhere. In a household, as the family possessions and culture are passed on, it is simply termed as continuing the legacy. In an HUF, according to HUF laws, after the Karta (head of the HUF) dies, the senior most coparcener becomes the head of the HUF. In corporates, the larger the scale and complexity of business, the need for succession planning becomes much more important. Unlike in the case of a household, corporates involve the livelihood and interests of thousands of people,  i.e., the shareholders, vendors, customers and other stakeholders. The intent of succession planning is not to oust the leader from his / her position but to prepare the next generation to become the future leaders. Succession planning is required to ensure smooth running of business. The torch bearer (leader here), has to groom his / her successor to take over his role.

In an organization, succession planning is an important element of corporate governance. In this write-up, the author has tried to emphasize on the need and importance of succession planning.

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FAQs on Purpose and Effect test for RPTs

-Team Vinod Kothari and Company | corplaw@vinodkothari.com

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