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Adding Strain to Injury: Amendments impose Additional procedural requirements for insolvency applications

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–Megha Mittal

(resolution@vinodkothari.com)

On 24th September, 2020, the Ministry of Corporate Affairs notified the Insolvency and Bankruptcy (Application to Adjudicating Authority) (Amendment) Rules, 2020 (“Amendment Rules”)[1] in exercise of its powers under section 239 of the Insolvency and Bankruptcy Code, 2016 (“Code”), thereby requiring an advance copy of all applications filed before under section 7, 9 or 10 of the Code, to be served to the Corporate Debtor and the Insolvency and Bankruptcy Board of India (“IBBI”).

By way of the said Amendment Rules, it is now required that-

  • An application intended to be filed under section 7, 9 or 10, has to be served to the Corporate Debtor and the Board, prior to filing before the Adjudicating Authority (“AA”)
  • The application filed before the AA must contain a proof of service to the Corporate Debtor and the Board;
  • Disclosure by the Insolvency Professional (IP) with respect to the ongoing assignments at the time of filing;
  • The application to be filed by the Operational Creditor must contain a certificate by the bank/ financial institution, where the creditor has its accounts, with respect to the sums which have been received by the Operational Creditor from the Corporate Debtor.

In this Article, we analyse the Amendment Rules, more specifically the requirement of advance notice, and its implications.

Service of the Application- ensuring a fair chance to be heard

NCLT and Principles of Natural Justice

The NCLT is a quasi-judicial body, constituted under section 408 of the Companies Act, 2013, and is subject to powers and duties set out under the National Company Tribunal Rules, 2016, as well as the Companies Act- One such duty is to ensure that the Rules of Natural Justice are abided by[2].

The Rules of Natural Justice, viz, (i) Rules against bias[3]; and (ii) the right to be heard[4] are not derived from any statute or constitution- it is based on common and moral law to ensure there is no contempt of justice. One of the components of the right to be heard is a “proper notice”, which ensures that the person who would be affected upon filing of the application is given notice of such filing to show cause against the proposed action. As such, whenever an application is filed, under any statute, or before any authority, it is a pre-requisite to serve an advance copy to the respondent.

Hence, the requirement to serve an advance copy of the application, to the corporate debtor existed prior to the Amendment Rules.

Additional service upon IBBI

The Amendment Rules now provide that an advance copy of the application has to be served on the Board as well, which in the humble view of the Author, seems to be a superfluous requirement.

First, the Central Government (MCA) has failed to provide any stated objectives or purpose behind such a requirement. While it may be argued that the same is for ensuring proper records and data, it must be noted that those applications which are eventually admitted, are anyway required to be informed to Board. The extant reporting requirement under the IBBI (Insolvency Process for Corporate Persons), Regulations, 2016 (“CIRP Regulations”), inter-alia intimation to IBBI in Form A, disclosure requirements forms CIRP-1, already ensure that sufficient information is provided to the Board to execute its functions as such.

However, if the objective behind such additional requirement was merely record keeping, the same could have also been provided for by integration or a simple cross-linking process with the already existing data rooms, from where the regulatory bodies may extract information as and when required. For instance, the e-filing portal of NCLT may make necessary arrangements such that once an application is filed on the portal, the information regarding such filing is simultaneously given to the Board.

Such a set-up would not only fulfil the understandable objective behind the Amendment Rules, but only waive off this additional burden levied upon the applicants. This would also be in concurrence with consistent suggestions of stakeholders towards creation of a common repository of data related to the Code.

It further remains unanswered whether in case of any supplementary filing and/ or rectified filing upon directions of the Bench, such advance service would be required again? In absence of any stated objective behind such Amendments, it would be difficult to comment if at all such re-servicing of a copy of the application would be required.

Readers may recall that a similar requirement of impleading the MCA in all applications filed under the Code was made mandatory by an order of the Hon’ble NCLT, Principal Bench, dated 22.11.2019[5] but later on nullified by an over-ruling order of the Appellate Tribunal[6] as one leading to duplicity of information and records. Similarly, the requirement of advance notice to the Board seems to be of a similar nature, and hence, in view of the Author, should not be added as a mandate.

Other Amendments

In addition to the service requirements as discussed above, the Amendment Rules also introduce further reporting obligations on the IPs and the Operational Creditors- the same has been discussed herein below-

Reporting of ongoing assignments by IPs

The Amendment Regulations, by way of an additional clause in Form 2, now requires that while giving consent to act as an RP, the Insolvency Professional must disclose the number of ongoing assignments that s/he has undertaking as on the day of filing of application.

In view of the Author, while the same is not required as information of similar nature is already required to be provided in Form IP-1. Hence, the same may be removed for the sake of brevity.

Obtaining Certificate by Banks/ Financial Institutions

As per Form 5 under Rule 6, of the NCLT Rules, an application filed by an operational creditor, other than creditors having their account with a foreign bank/ institution, must annex a copy of the relevant accounts from the banks/financial institutions maintaining accounts of the operational creditor confirming that there is no payment of the relevant unpaid operational debt by the operational debtor,if available.

 Hence, the operational creditors could simply self-certify their bank statements and submit the same on affidavit, as being a part of the application.

However, the Amendment Rules have substituted the above requirement with a new form, namely Form 5A, which is a certificate required to be obtained from the bank/ financial institution that the amount for which the application is being filed, has not been received by the creditor.

The Author is of the view that the said requirement would only lead to needless complication and delays. This would not only impose an additional requirement upon the creditors, but would also burden the banks/ financial institutions who may receive requests for such certificate in large volumes. Hence, it is suggested that the earlier modus shall continue, and the requirement of such certificate may be done away with.

Further, it is also pertinent to note that recent amendment in section 4 of the Code, whereby the minimum default amount for filing an application under the Code, was increased from Rs. 1 lakhs to Rs. 1 crore already led to a massive sweep-out of OCs from the purview of IBC. Further procedural burden, for example requirement of a bank certificate, would only make recourse a tougher for the OCs.

Implications

From the discussion above, we can gather that a common element through-out the Amendment Rules is increased disclosure/ reporting/procedural requirements. The Author humbly states that while the consistent efforts of the Government and Board, and the common suggestions from the stakeholders has been directed towards easing the superfluous, more-than-needed reporting and disclosure requirement, the Amendment Rules come as a complete deviation.

While the objectives, purpose of advance service is neither explicitly stated not implied from the text, it must be noted that the same is not a substitution of existing regulations, but an additional requirement for concerns already covered. The Amendments infact lead to elongated procedures, which do not serve any additional purpose.

In this pretext the Author is of the humble view that the Amendment Rules do not provide any ease, clarification and/ or assistance in the filing process. As such, the Central Government may consider a roll-back of the same.

[1] https://www.ibbi.gov.in/uploads/legalframwork/27e336abe5b5328297a2ba5b35b39fac.pdf

[2] Sec 424 (1) of the Companies Act, 2013

[3] Nemo judex causa in sua

[4] Audi Alteram Partem

[5] Read our views on this order, in our article- http://vinodkothari.com/2019/11/mandatory-impleadment-of-mca-as-a-respondent/

[6] By an order dated 22.05.2020

MCA widens CSR for defence personnel

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Measures for the CAPF and CMPF veterans and dependants now a part of CSR activity

Ankit Vashishth, Executive, Vinod Kothari and Company; corplaw@vinodkothari.com

Introduction

Schedule VII of the Companies Act, 2013 (‘Act’) currently includes measures taken for the armed forces veterans, war widows and their dependants as one of the CSR activities. The Ministry of Corporate Affairs (“MCA”) vide its Notification[1] dated 23rd June, 2020 has included contribution made towards the benefit of Central Armed Police Forces (CAPF) and Central Para Military Forces (CPMF) veterans and their dependents including widows, within the ambit of CSR.

MCA has issued several notifications either to clarify or broaden the ambit of Schedule VII. This Notification is yet another step taken by the MCA for widening the scope of CSR activities to include CAPF and CMPF veterans and their dependants and war widows.

This note tries to provide a quick coverage on the said amendment.

Difference between Armed Forces and CAPF/CPMF

Armed Forces CAPF CPMF
The term “armed forces” basically means – Indian Armed Forces which are the military forces of the Republic of India. It comprises three professional uniformed services :

1.   The Indian Army

2.   The Indian Navy

3.   The Indian Air Force

 CAPF (Central Armed Police Force)[2]  consists of :

1.         Assam Rifles (AR);

2.         Border Security Force (BSF);

3.         Central Industrial Security    Force (CISF);

4.         Central Reserve Police Force (CRPF);

5.         Indo Tibetan Border Police (ITBP);

6.         National Security Guard (NSG); and

7.       Sashastra Seema Bal (SSB)

 The nomenclature CAPF will be used uniformly for CPMF as per the Office Memorandum [3]issued by the Ministry of Home Affairs issued on March 18, 2011

Current CSR spending pattern and changes expected due to the amendment

The current pattern for CSR spending for armed forces veterans, war widows and their dependants include contributions to several funds like:

  1. Armed Forces Flag Day Fund (AFFDF)[4]
  2. Army Wives Welfare Association (AWWA)[5]
  3. The Army Welfare Fund Battle Casualties[6]

Apart from donating to these funds, companies have also provided financial relief to the martyr’s families and have conducted workshops for the children of war widows as a part of their CSR projects.

Further, in addition to the above, contribution to “National Defence Fund” which is used for the welfare of the members of the Armed Forces (including Para Military Forces) should be eligible for being a CSR activity.

As a result of the enhanced scope for CSR spending for CAPF/ CAMF, contribution to the fund “Bharat Ke Veer Corpus Fund”[7], which was previously not eligible for CSR considering the fact that it specifically benefits CAPF, will now be covered as per the amendment. Accordingly, any contribution to this fund will now qualify as a CSR activity.

High Level Committee on CSR

MCA had constituted[8] a High Level Committee (HLC) on CSR in February, 2015 under the Chairmanship of Secretary (Corporate Affairs) to review the existing CSR framework and formulate a coherent policy on CSR and further make recommendations on strengthening the CSR ecosystem, including monitoring implementation and evaluation of outcomes. Later, the HLC on CSR was re-constituted[9] in November, 2018. The scope of HLC was widened to include recommendation of guidelines for enforcement of CSR provisions. Though the Report discussed on amending Schedule VII in line with promoting sports, senior citizens’ welfare, welfare of differently abled persons, disaster management, and heritage, however, it did not consider widening the clause relating to the scope of armed forces in the Schedule.

Further, as evident from the data given in the HLC Committee Report[10], CSR expenditure made on armed force veterans, war widows/ dependents have seen an upward trend over the years, however it forms a very small proportion of the total CSR expenditure made.

Concluding Remarks

The service spirit of CAPF is no less than that of the Indian Army. Acknowledging this fact MCA has brought this amendment. While all the areas for CSR are extremely important for the overall socio-economic welfare and development, the measures taken for the benefit of veterans and dependants of the armed forces and CAPF/ CPMF is an extremely noble activity.

Link to our other articles:

CSR: A ‘Corporate Social Responsibility’ or a ‘Corporate Social Compulsion’?

http://vinodkothari.com/2019/08/csr-a-corporate-social-responsibility-or-a-corporate-social-compulsion/

Proposed changes in CSR Rules

http://vinodkothari.com/2020/03/proposed-changes-in-csr-rules/

FAQs on Corporate Social Responsibility

http://vinodkothari.com/2019/11/faqs-on-corporate-social-responsibility/

Read our other articles on Corplaw : http://vinodkothari.com/category/corporate-laws/

Link to our Youtube Channel : https://www.youtube.com/channel/UCgzB-ZviIMcuA_1uv6jATbg

 

[1] http://egazette.nic.in/WriteReadData/2020/220133.pdf

[2] https://www.mha.gov.in/about-us/central-armed-police-forces

[3] Office Memorandum can be viewed here

[4] http://ksb.gov.in/armed-forces-flag-day-fund.htm

[5] https://awwa.org.in/contribution-under-csr-awwa

[6] The Army Welfare Fund Battle Causalities

[7] https://www.bharatkeveer.gov.in/about

[8] https://www.mca.gov.in/Ministry/pdf/General_Circular_01_2015.pdf

[9] https://www.mca.gov.in/Ministry/pdf/OfficeOrderCommitteeOnCorporate_26112018.pdf

[10] https://www.mca.gov.in/Ministry/pdf/CSRHLC_13092019.pdf

 

 

MCA need not be mandatorily impleaded in applications: NCLAT sets-aside directions issued by of Principal Bench

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–Megha Mittal

(resolution@vinodkothari.com)

The Hon’ble National Company Law Appellate Tribunal (‘NCLAT’), vide its order dated 22nd May, 2020[1] set aside the directions issued by the Hon’ble Principal Bench for impleadment of Ministry of Corporate Affairs (‘MCA’) as a respondent-party to all applications filed under the Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016.

This comes in light of the order dated 22nd November, 2019 of the Hon’ble National Company Law Tribunal, Principal Bench of New Delhi (‘NCLT’/ ‘Principal Bench’), in the matter of Oriental Bank of Commerce v. Sikka Papers Ltd. & Ors[2], wherein the Hon’ble NCLT directed that “…In all cases of Insolvency and Bankruptcy Code, and Company Petition, the Union of India, Ministry of Corporate Affairs through the Secretary be impleaded as a party respondent so that authentic record is made available by the officers of the Ministry of Corporate Affairs for proper appreciation of the matters..”(‘Impugned Directions’). The said requirement was directed to be made applicable in all benches of NCLT, pan-India.

Read more →

Resources on Virtual AGM

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In the present scenario, it is difficult to conduct physical AGM. Considering the disruption caused due to COVID-19, the Ministry of Corporate Affairs vide its circular dated 5th May, 2020 allowed companies to hold AGM through video conferencing.

We have put up this page to provide the access to all relevant resources on the subject at one place, along with our analysis. Hope that the readers find it useful.

Presentation on General Extension for holding AGM for FY 2019-2020 by Ms. Pammy Jaiswal

Presentation on Virtual AGMs by Ms. Pammy Jaiswal

Presentation on Virtual AGMs

Checklist for AGM by VC for Companies providing e-voting facility

Checklist for AGM by VC for Companies not providing e-voting facility

Pre-notice public advertisement for vitual AGMs

Draft notice of Virtual AGM

Post-notice public advertisement for virtual AGMs

FAQs on conducting AGM through video conferencing

Convening of AGM during COVID-19 crises 

Convening of AGM during COVID-19 crisis

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-Will VC mode motivate the companies to call the AGM early?

Bunny Sehgal, corplaw@vinodkothari.com

Background

In view of the COVID-19 outbreak, the Ministry of Corporate Affairs (‘MCA’) had come up with the circular dated April 08, 2020[1] providing certain relaxations from the provisions of Companies Act, 2013 (‘Act’) and rules made thereunder including conducting the extra-ordinary general meeting (‘EGM’ or ‘Meeting’) for passing the resolutions of urgent nature through video conferencing (‘VC’) and other audio visual means (‘OAVM’) till June 30, 2020. Further, in order to provide more clarity on the modalities to be followed by the companies for conducting EGM viz. manner of issuance of notice, voting by show of hands and postal ballot etc., another circular dated April 13, 2020[2] (Collectively referred to as ‘EGM Circulars’) was brought in force. In continuation to the aforesaid circulars and in view of the social distancing norms and other restrictions thereof, MCA provided an extension of 3 months for holding annual general meeting (‘AGM’) for the companies having the calendar year as the financial year vide its circular dated April 21, 2020[3].

Now, considering the representations of various stakeholders, MCA has issued a circular dated May 05, 2020 [4](‘AGM Circular’) in line with the relaxations provided under the EGM Circulars to hold AGMs through VC/ OAVM.

While the AGM Circular will draw its reference from the EGM Circulars in terms of the modalities, however, there are various issues worth discussing to understand the scope, impact and applicability for companies to call AGM during the COVID-19 crisis. This write-up focuses on some of the issues and also provides the comparison between both the EGM Circulars and AGM Circular.

Scope and applicability

The AGM Circular applies to all the AGMs to be called by companies within the calendar year 2020. Generally speaking all the companies will call their AGM for the financial year 2019-2020 in the calendar year 2020 only. Therefore, one may conclude that this AGM Circular can be availed by all the companies without any exception. Having said that, it is also pertinent to mention that a specific condition has been laid down for companies which are not mandated to provide e-voting facility, to call their AGMs under this AGM Circular.

Para B (I) of the AGM circular provides that such companies can conduct their AGM through VC or OAVM only if the company has in its record, the email-ids of at least half of its total number of members, who –

  • in case of a Nidhi, hold shares of more than one thousand rupees in face value or more than one per cent. of the total paid-up share capital, whichever is less;

 

  • in case of other companies having share capital, who represent not less than seventy-five per cent. of such part of the paid-up share capital of the company as gives a right to vote at the meeting;

 

  • in case of companies not having share capital, who have the right to exercise not less than seventy-five per cent. of the total voting power exercisable at the meeting

While the AGM Circular provides three classes of companies, most of the companies fall under the second class where two types of majority has been mentioned. The following flow chart represents the manner in which such classes of companies, as a pre-requisite will need to have the email-ids registered with themselves:

Further, while this AGM Circular is applicable on companies, other entities like public sector banks will not be covered under this circular. Seemingly, SEBI will have to provide some sort of similar relaxation to such entities.

Furthermore, while the AGM circular comes with the time frame to avail the AGM Circular within the calendar year 2020, however, considering the fact that there would be movement restrictions even after the lockdown is lifted, therefore, this added feature, seems to be of a permanent nature for the times to come under Indian legislation. Also, many countries like US and UK already allow this facility and other countries like Hong Kong, Austria, Belgium, Germany and Italy, etc. have started giving this facility post the outbreak of COVID-19.

Motivation to conduct AGM through VC/ OAVM

After the enforcement of the AGM Circular, the companies will be motivated to convene the AGM through VC/OAVM mode. The reasons for such a motivations are many, some of them are as follows:

  1. Less time consuming process;
  2. Operating convenience;
  3. Cost effectiveness;
  4. Environment friendly;
  5. Sooner getting the advantage of last audited accounts;

While there are many reasons to conduct the AGM through VC/OAVM mode, the only difficulty seems to be is the completion and audit of the annual accounts. Once the audit is done, the companies may proceed for convening the AGM through this mode.

Will Companies want to convene their AGM early?

This question in our view, should be in affirmative for various reasons as given below:

  • Saving in cost
  • Various provisions under the CA, 2013 and various other laws (especially which are applicable to NBFCs) provide exemptions or benefits to the companies based on the net worth or assets size as per the last audited financial statements. Some them include:
    • NBFCs having asset size is of ₹ 500 cr or more as per last audited balance sheet are considered as systemically important NBFCs;
    • Applicability of CSR provisions under section 135 of the CA, 2013;
    • Appointment of independent and woman director under section 149 of the CA, 2013;
    • Constitution of audit committee under section 177 of the CA, 2013;
    • Applicability of secretarial audit under section 204.
  • Early AGM would mean early declaration of dividend and therefore a step towards shareholder service.
  • The restrictions on gathering may still continue after lifting of the lock-down.

AGM Circular to cover both ‘Ordinary Business’ and ‘Special Business’

Para A(II) and B(IV) of the AGM Circular provides the type of business which will be transacted in the AGM through VC/OAVM. The text of the same is provided below:

“In such meetings, other than ordinary business, only those items of special business, which are considered to be unavoidable by the Board, may be transacted.”

While on the first reading of the para it seems that the AGM Circular will allow to convene the AGM by VC/OAVM only for the unavoidable special business. However, that should not be the intent of the lawmakers as an AGM without the ordinary business will have to be adjourned till such time the ‘Ordinary Business’ items are decided and concluded. Therefore, aforesaid para should be construed and interpreted in a manner to include the unavoidable special business along with the ordinary business items. Accordingly, in the light of aforesaid circular, the company may proceed with to pass the ordinary as well as unavoidable special business in their AGM.

Further, for items requiring right of representation like removal of auditors or directors, etc. cannot be conducted through VC/OAVM as mentioned under EGM Circular.

Meaning of the term ‘Unavoidable’

Both the AGM as well as the EGM Circulars use the term ‘unavoidable’ business matters. The term ‘unavoidable’ means something which cannot be deferred and should not be deferred. If a company is calling and conducting its AGM, there is no reason for the company to unnecessarily defer any item of business and call a separate meeting to deal with them. Therefore, no company would ideally call a separate meeting to decide on matters just because they were not requiring immediate action during the said year. Accordingly, based on the reason of exigency or business urgency, etc., the Board of the company has to decide on the matters which are unavoidable.

Comparison of the Circulars

A meeting of the shareholders’ which is required to be convened by the companies on an annual basis, on account of a statutory requirement is called as AGM. Whereas an EGM is required to be convened by a company when the approval of the shareholders’ is required on urgent matters. The AGM Circular provides that the framework and manner of issuing notices provided in the EGM Circulars shall be applicable mutatis mutandis for conducting the AGM. While both the meetings are of the shareholders only, however called and conducted with different mindset altogether. Accordingly, it is imperative to see the implications of the provisions of EGM Circulars on the AGM. A brief comparison of both circulars is provided below:

Sr. No. Heading Provisions under the EGM Circulars Provisions under AGM Circular
1.       Type of business Only the unavoidable business shall be transacted at the EGM (excluding ordinary business items and matters requiring right of representation). Only the unavoidable business in addition ordinary business shall be transacted at the AGM as discussed above.
2. Notice of the Meeting The notice of the Meeting may be given only through email registered with the company/depository participant/depository. The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
 

For companies which are required to provide the e-voting facility

 
3. Content of the public notice under rule 20  of the Companies (Management and Administration) Rules, 2014 The following contents shall form part of the public notice for e-voting:

i.          a statement that the EGM shall be convened through VC or OAVM;

ii.          date and time of the EGM;

iii.          availability of notice on the website of the company and stock exchange, if required;

iv.          the manner in which the following can cast their votes:

a.      physical shareholders;  and

b.     who have not registered their email addresses with the company;

v.          the manner in which the persons can get their email addresses registered;

vi.          any other detail considered necessary by the company

 

 The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
1. Maintenance of recorded transcript The recorded transcript shall be maintained by the company. In case of public company, the recorded transcript shall also be made available on the website of the company. The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
2. Minimum standards of VC/OVAM facility Ensure that the Meeting through VC/OAVM facility allows two way teleconferencing for the ease of participation of the members. The VC/OVAM facility must have a capacity to allow at least 1000 members to participate on first come first serve basis.

 

 The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
3. Time frame for VC/OVAM facility The VC/OVAM facility shall be kept open at least 15 minutes before the scheduled time of the EGM and shall not be closed till the expiry of 15 minutes after the conclusion of the scheduled time for EGM. The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
4. Attendance through VC/OVAM Attendance of members through VC/OAVM shall be counted for quorum under section 103 of the Act. The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
5. Voting by the members present in the Meeting The members who are present in the EGM through VC/OAVM facility and have not casted their vote through remote e-voting shall be allowed to vote through e-voting system. The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
6. Election of chairman Unless the articles require any specific person to be appointed as a Chairman for the Meeting, the Chairman for the Meeting shall be appointed in the following manner:

i.          where there are less than 50 members present at the Meeting, the Chairman shall be appointed in accordance with section 104;

ii.          in all other cases, the Chairman shall be appointed by a poll conducted through the e-voting system during the Meeting.

 

 The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
7. E-voting facility during the Meeting The Chairman shall ensure that the facility of e-voting system is available for voting during the Meeting held through VC/OAVM.

 

 The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
8. Voting by the authorized representatives The representatives of the members may be appointed for the purpose of voting through remote e-voting or for participation and voting in the Meeting held through VC/OAVM. The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
9. Role of Scrutinizer The company should be required appoint a scrutinizer in accordance with the applicable provisions of the CA, 2013 red with allied rules for enabling transparent voting free from any conflict of interest. Same as for EGM.
10. Attendance of independent director and the auditor At least one independent director (if is required to appointed), and the auditor or his authorized representative, shall attend such Meeting through VC/ OAVM. The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
11. Notice issued prior to the EGM Circulars In case a notice for Meeting has been served prior to the date of the EGM Circulars, the framework proposed in this Circular may be adopted for the Meeting, in case the consent from members has been obtained in accordance with section 101(1) of the Act, and a fresh notice of shorter duration with due disclosures in consonance with this Circular is issued consequently. For companies which have already sent their notices for calling AGM, should be required to send out fresh notices containing the fact that meeting will conducted through VC/OAVM in terms of the AGM Circular.

 

In our view, the length of AGM notices can remain 21 days unless the same is called at a shorter notice.
12. Filing of resolutions All resolutions, passed in accordance with this mechanism shall be filed with the ROC within 60 days of the Meeting, clearly indicating therein that the mechanism provided herein along with other provisions of the Act and rules were duly complied with during such Meeting. The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
 

For companies which are not required to provide the e-voting facility

 
1. Intimation to the members w.r.t the Meeting The company shall contact all the members whose e-mail addresses are not registered with the company over telephone/any other mode, before sending notice to all the members;

 

 The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
2. Content of the public notice Where the contact details of any of the members are not available with the company, it shall issue of public notice in vernacular language and vernacular newspaper in which the registered office is situated, & in English language and English newspaper having wide circulation in that district and electronic editions.

 

The following content shall form part of the public notice:

i.          a statement that the EGM shall be convened through VC or OAVM; and the company proposes to send the notice by email  at least 3 days from the date of publication of the public notice;

ii.          the details of the email address along with the phone number on which the members may contact for getting their e-mail addresses registered for participation and voting in the Meeting

 

 The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
3. Maintenance of recorded transcript The recorded transcript shall be maintained by the company. In case of public company, the recorded transcript shall also be made available on the website of the company. The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
4. Minimum standards of VC/OVAM facility Ensure that the Meeting through VC/OAVM facility allows two way teleconferencing for the ease of participation of the members. The VC/OVAM facility must have a capacity to allow at least 500 members or members equal to total number of members, whichever is lower to participate on first come first serve basis.

 

 The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
5. Timeframe for VC/OVAM facility The VC/OVAM facility shall be kept open at least 15 minutes before the scheduled time of the EGM and shall not be closed till the expiry of 15 minutes after the conclusion of the EGM. The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
6. Attendance through VC/OVAM Attendance of members through VC/OAVM shall be counted for quorum under section 103 of the Act. The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
7. Designated e-mail address for voting. The company shall provide a designated e-mail address to all members at the time of sending the notice of Meeting so that the members can convey their vote, when a poll is required to be taken during the Meeting on any resolution, at such designated email address. The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
8. Voting through registered e-mail only During the Meeting held through VC/OVAM facility, where a poll on any item is required, the members shall cast their vote on the resolutions only by sending their email addresses which are registered with the company. The said emails shall only be sent to the designated email address circulated by the company in advance. The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
9. Election of chairman Unless the articles require any specific person to be appointed as a Chairman for the meeting, the Chairman for the Meeting shall be appointed in the following manner:

iii.          where there are less than 50 members present at the Meeting, the Chairman shall be appointed in accordance with section 104;

iv.          in all other cases, the Chairman shall be appointed by a poll conducted through the registered e-mail during the Meeting.

 

 The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
10. Voting by the authorized representatives The representatives of the members may be appointed for the purpose of voting through registered e-mail or for participation and voting in the Meeting held through VC/OAVM. The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
11. Attendance of independent director and the auditor At least one independent director (if is required to appointed), and the auditor or his authorized representative, shall attend such Meeting through VC/ OAVM. The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
12. Role of Scrutinizer The company may appoint a scrutinizer even though on a voluntary basis for enabling transparent voting free from any conflict of interest. Same as for EGM.
13. Declaration of voting results In case the counting of votes requires time, the said meeting may be adjourned and called later to declare the result. The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.
14. Notice issued prior to the EGM Circulars In case a notice for Meeting has been served prior to the date of the EGM Circulars, the framework proposed in this Circular may be adopted for the Meeting, in case the consent from members has been obtained in accordance with section 101(1) of the Act, and a fresh notice of shorter duration with due disclosures in consonance with this Circular is issued consequently. For companies which have already sent their notices for calling AGM, should be required to send out fresh notices containing the fact that meeting will conducted through VC/OAVM in terms of the AGM Circular.

 

In our view, the length of AGM notices can remain 21 days unless the same is called at a shorter notice.
15. Filing of resolutions All resolutions, passed in accordance with this mechanism shall be filed with the ROC within 60 days of the Meeting, clearly indicating therein that the mechanism provided herein along with other provisions of the Act and rules were duly complied with during such Meeting. The provisions of EGM Circular will be mutatis mutandis apply for convening the AGM.

Additional requirements to be complied with by the companies which are required to provide the e-voting facility:

  • Publication of a notice by way of newspaper advertisement before sending the notices and copies of the financial statements, etc., and specifying in the advertisement the following information.
    1. a statement that the AGM shall be convened through VC or OAVM;
    2. date and time of the AGM;
    3. availability of notice on the website of the company and stock exchange, if required;
    4. the manner in which the shareholders holding shares in physical mode, or who have not registered their email addresses with the company can cast their vote through remote e-voting or through the e-voting system during the meeting;
    5. the manner in which the persons can get their email addresses registered;
    6. the manner in which the members can give their mandate for receiving dividends directly in their bank accounts through the Electronic Clearing Service (ECS) or any other means;
    7. any other detail considered necessary by the company
  • Circulation of the board’s report, financial statements and other documents through e-mail instead of physical copies;
  • Where the company is unable to pay the dividend to any shareholder by the electronic mode, due to non-availability of the details of the bank account, the company shall upon normalization of the postal services, dispatch the dividend warrant/cheque to such shareholder by post;
  • Where the company has been permitted to conduct its AGM at its registered office, or at any other place as provided under section 96 of the Act, the company may in addition to holding such meeting with physical presence of some members, also provide the facility of VC or OAVM, to allow other members of the company to participate in such meeting.
  • The companies shall ensure that all other compliances associated with the provisions relating to general meetings viz making of disclosures, inspection of related documents/registers by members, or authorizations for voting by bodies corporate, etc as provided in the Act and the articles of association of the company are made through electronic mode.

Additional requirements to be complied with by the companies which are not required to provide the e-voting facility:

  • AGM may be conducted through the VC/OAVM facility only if the company which has the email addresses of at least half of its total number of members, in its records, and
    1. in case of a Nidhi, hold shares of more than 1000 rupees in face value or more than 1% of the total paid-up share capital, whichever is less;
    2. in case of other companies having share capital, hold at least 75% the paid-up share capital;
    3. in case of companies not having share capital, who have the right to exercise not less than 75% of the total voting power exercisable at the meeting.
  • The company shall take all necessary steps to register the email addresses of all persons who have not registered their email addresses with the company.
  • The board’s report, financial statements and other documents will be circulated through e-mail instead of physical copies;
  • The companies shall make adequate provisions for allowing the members to give their mandate for receiving dividends directly in their bank accounts through the Electronic Clearing Service (ECS) or any other means.
  • The company shall upon normalization of the postal services, dispatch the dividend warrant/cheque by post to the shareholders, whose bank accounts are not available.
  • The companies shall ensure that all other compliances associated with the provisions relating to general meetings viz making of disclosures, inspection of related documents/registers by members, or authorizations for voting by bodies corporate, etc as provided in the Act and the articles of association of the company are made through electronic mode.

Application for extension of AGM for certain companies

The companies which do not have calendar year as their financial year and are unable to conduct their AGM in accordance with the framework provided in AGM Circular may apply for the application for extension of AGM before the concerned Registrar of Companies under section 96 the Act.

Conclusion

Many companies which have already approved their AGM notices will have to make suitable changes therein in line with the said circular. Further, post the issue of this AGM Circular, most of the companies will be making their debut in conducting the AGM through VC/ OAVM and it will be interesting to see smooth convening amidst the crisis.

[1] http://mca.gov.in/Ministry/pdf/Circular14_08042020.pdf

[2]  http://www.mca.gov.in/Ministry/pdf/Circular17_13042020.pdf

[3] http://www.mca.gov.in/Ministry/pdf/Circular18_21042020.pdf

[4] http://www.mca.gov.in/Ministry/pdf/Circular20_05052020.pdf

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RPTs and related exemptions in the context of Government companies

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Munmi Phukon and Tanvi Rastogi

corplaw@vinodkothari.com

Introduction

Ministry vide its Notification[1] dated 5th June, 2015 issued certain modifications/ exemptions/ exceptions for Government Companies on certain provisions of the Companies Act, 2013. One such exemption was with respect to the provisions pertaining to related party transactions (RPTs). Vide the said Notification, Government Companies were provided relaxation from obtaining the prior shareholders’ approval as required under the first proviso to section 188(1) and consequently, from the restriction on the affirmative voting by the related parties for (a) contracts/ arrangements with other Government Company(ies) and (b) where the Government Company is not a listed company, contracts/ arrangements with related parties other Government companies as mentioned above, if prior approval of the Ministry/ Department of the Central Government (CG) or State Government (SG) administrative in charge of the Company is obtained.

The aforesaid Notification has been revisited by the Ministry by issuing a further Notification[2] dated 2nd March, 2020 (2020 Notification) whereby the said exemptions have been extended to the contracts/ arrangements by the Government Companies with CG/ SG/ any combination thereof.

Before analysing the relevance of the 2020 Notification, one has to understand the related parties from a Government Company’s perspective. This article analyses the provisions of the Companies Act, 2013 (Act) only, considering the Notification has been brought in by the Ministry of Corporate Affairs.

Related parties for a Government Company

As per clause (76) of section 2 of the Act following shall be a related party with reference to a company:

  1. a director or his relative;
  2. a key managerial personnel or his relative;
  3. a firm, in which a director, manager or his relative is a partner;
  4. a private company in which a director or manager or his relative is a member or director;
  5. a public company in which a director or manager is a director and holds along with his relatives, more than two per cent of its paid-up share capital;
  6. any body corporate whose Board of Directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager;
  7. any person on whose advice, directions or instructions a director or manager is accustomed to act:                                                            Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in a professional capacity;
  8. any body corporate which is—
    • a holding, subsidiary or an associate company of such company;
    • a subsidiary of a holding company to which it is also a subsidiary; or
    • an investing company or the venturer of the company
  9. a director other than an independent director or key managerial personnel of the holding company or his relative as prescribed under Rules

Accordingly, to consider someone as related party, he/ she/ it shall have to strictly fall under any of the aforesaid sub-clauses. Seemingly, the Government of India or any State Government having controlling stake in the company does not get fit in any of the said clauses as the CG/ SG is neither considered as a person nor an entity/ body corporate. Accordingly, CG/ SG is not a related party to a Government Company as per the aforesaid definition.

Similarly, to consider another Government Company as a related party for a Government Company, the former shall also be required to fall under the definition. Accordingly, one will have to determine whether the former Government Company is a related party or not, based on its structure i.e. private company, public company, body corporate, and also based on its relationship with the subject Government company i.e. holding company, subsidiary company, associate company etc.

Position before and after 2020 Notification

 Transaction between Government companies and CG / SG

 The position with respect to transactions between the Government Company and the CG/ SG before and after the 2020 Notification remains same as CG/ SG, as discussed above, does not get covered under the purview of the definition of related party provided under the Act. Therefore, until and unless there is a related party on the other side, any transactions with any other party cannot be considered as RPT. Accordingly, where the transaction itself is not an RPT, exemption from the provisions pertaining to RPTs does not arise.

Transaction between two Government Companies

As discussed above, for considering another Government Company as related party one has to consider the status of such company. Accordingly, for a Government Company, the following Government Companies may be considered as related party:

  1. A Government Company which is a private company in which a director, manager or relative thereof of the first mentioned Government Company is a member or director;
  2. A Government Company which is a public company in which a director or manager of the first mentioned Government Company is a director and holds along with his relatives, more than two per cent. of its paid-up share capital;
  3. A Government Company which is either the holding company or subsidiary or associate company of the first mentioned Government Company;
  4. A Government Company which is a fellow subsidiary of the first mentioned Government Company;
  5. A Government Company to which first mentioned Government Company is an associate company

Considering the structure of the Government Companies, it is very unlikely to have related parties covered under point (a) and (b) above. Coming to the position before or after the 2020 Notification, there is no change, as the 2015 Notification already covered transactions between two Government Companies.

Transactions between the Government Companies and other related parties including non- Government Companies

From the definition provided in the Act, the following persons/ entities may also be considered as related parties for a Government Company:

  1. Individuals who are director, key managerial personnel (KMP), relatives of director/ KMP (s), a director other than an independent director or KMP of the holding company or his relative;
  2. Firm in which a director or manager or relative thereof is a partner;
  3. Non- Government Companies such as:
    • Private companies in which a director or manager or relative thereof is member or director;
    • Public companies in which a director or manager is a director and holds > 2% of its paid-up share capital, singly or jointly with his relatives;
  4. Body corporate whose Board/ managing director/ manager accustomed to act in accordance with the advice, directions or instructions of a director or manager;
  5. Any person on whose advice, directions or instructions a director or manager is accustomed to act.

While the parties mentioned in point (d) and (e) above, cannot be determined without analysing the proper facts and considering these are purely circumstantial in nature, it is very unlikely to have such related parties. As regards the position before and after the 2020 Notification, the transactions between these related parties will still require the prior approval of the administrative Ministry in charge, if the company is not obtaining prior shareholders’ approval. Accordingly, there is no change in the position after 2020 Notification.

Conclusion

While the 2020 Notification is an extended version of the 2015 Notification, however, it seems that it does not carry any relevance at all. The reason for the same is that CG/ SG, as discussed above, does not get covered under the purview of the definition of related party provided under the Act. Therefore, until and unless there is a related party on the other side, any transactions with any other party cannot be considered as RPT. Accordingly, where the transaction itself is not an RPT, exemption from the provisions pertaining to RPTs does not arise.

[1]http://ebook.mca.gov.in/notificationdetail.aspx?acturl=6CoJDC4uKVUR7C9Fl4rZdatyDbeJTqg3XHmN4i4mFb+v2wWhMvQoFsXKgJTHtRr9VmNjj/XQUFc9vZ6tRKIi2gIhxfNI2SOK

[2]http://www.mca.gov.in/Ministry/pdf/Notification_02032020.pdf

 

Our other articles on related party transactions:

http://vinodkothari.com/2020/02/proposed-changes-in-rpts-ppt/

http://vinodkothari.com/2019/11/mca-revisits-the-existing-cap-of-materiality-of-related-party-transactions-u-s-188/

http://vinodkothari.com/2017/09/presentation-on-related-party-transactionrpts-an-overview/