Archive for month: November, 2019
MCA revisits the existing cap of materiality of related party transactions u/s 188
Munmi Phukon | Vinod Kothari & Company
Ministry of Corporate Affairs (MCA) has recently come out with a Notification dated 18th November, 2019 amending the Companies (Meetings and Powers of Board) Rules, 2014. The same will be effective from the date of publication in the Official Gazette. This amendment, has the impact of removing the monetary thresholds for the various transactions listed in section 188 and keeping only the proportional thresholds related to turnover and net worth of the company. Notably, the rules under section 188 as originally framed in 2014 had put absolute thresholds, such as Rs 100/ 50 crores of transaction value etc. In case of companies of large size, these limits were obviously quite small and were very easily hit.
It is important to note that the question of shareholders’ approval under sec 188 (2) arises only in cases where the transaction does not adhere either of the two conditions – arms’ length, and ordinary course of business. While the cases of shareholders’ approval under sec. 188 are not very common, nevertheless the amendment will lead to easing out the provisions for RPT approvals.
It is also important to note that SEBI’s RPT approval requirements in terms of Regulation 23 of the Listing Regulations is even more liberal – it relates to 10% of the consolidated turnover of the entity.
Despite the amendment as above, gaps still remain between the requirements applicable to listed entities in terms of Regulation 23, and the requirements applicable under the Act u/s 188. The differences are wide-spread – from the meaning of “related party”, to the scope of “transactions”, to approval from shareholders, as also the clause disabling related parties from voting. Therefore, even with the amendments, RPT provisions remain enigmatic.
Here is a quick comparison-
| Respective clause of Rule 15(3)(a) | Existing Text | Revised Text | Remarks |
| (i) | sale, purchase or supply of any goods or materials, directly or through appointment of agent, amounting to ten per cent. or more of the turnover of the company or rupees one hundred crore, whichever is lower, as mentioned in clause (a) and clause (e) respectively of sub-section (1) of section 188; | sale, purchase or supply of any goods or materials, directly or through appointment of agent, amounting to ten per cent. or more of the turnover of the company or rupees one hundred crore, whichever is lower, as mentioned in clause (a) and clause (e) respectively of sub-section (1) of section 188; | Apart from the nature of transaction as provided in clause (ii) i.e. transaction pertaining to selling and disposing/ buying of property, the threshold for all other transactions shall be based on the turnover of the company. The threshold for clause (ii) shall be based on the net worth of the company.
Further to note, the revised limits are still different from the limits provided under SEBI Listing Regulations which is based on the consolidated turnover of the company. |
| (ii) | selling or otherwise disposing of or buying property of any kind, directly or through appointment of agent, amounting to ten per cent. or more of net worth of the company or rupees one hundred crore, whichever is lower, as mentioned in clause (b) and clause (e) respectively of sub-section (1) of section 188; | selling or otherwise disposing of or buying property of any kind, directly or through appointment of agent, amounting to ten per cent. or more of net worth of the company or rupees one hundred crore, whichever is lower, as mentioned in clause (b) and clause (e) respectively of sub-section (1) of section 188; | |
| (iii) | leasing of property of any kind amounting to ten per cent. or more of the net worth of the company or ten per cent. or more of turnover of the company or rupees one hundred crore, whichever is lower, as mentioned in clause (c) of sub-section (1) of section 188; | leasing of property of any kind amounting to ten per cent. or more of the net worth of the company or ten per cent. or more of turnover of the company or rupees one hundred crore, whichever is lower, [amounting to ten percent or more of the turnover of the company] as mentioned in clause (c) of sub-section (1) of section 188; | |
| (iv) | availing or rendering of any services, directly or through appointment of agent, amounting to ten per cent. or more of turnover of the company or rupees fifty crore, whichever is lower, as mentioned in clause (d) and clause (e) respectively of sub-section (1) of section 188: | availing or rendering of any services, directly or through appointment of agent, amounting to ten per cent. or more of turnover of the company or rupees fifty crore, whichever is lower, as mentioned in clause (d) and clause (e) respectively of sub-section (1) of section 188: |
See our other corporate law updates http://vinodkothari.com/resources/
Articles on similar topic – http://vinodkothari.com/2020/03/rpts-and-related-exemptions-in-the-context-of-government-companies/
Sectoral regulators empowered to petition insolvency of financial services providers: Central Govt notifies insolvency rules
–Vinod Kothari
The Central Govt on 15th November notified rules of procedure for insolvency proceedings for financial services providers, thereby indicating that the resolution and liquidation process for financial services entities has been taken out from the proposed enactment dealing with distress of financial entities. Notably, the actions in case of distress of financial services firms is not limited to insolvency – regulators take prompt corrective action, depending on the severity of the distress.
Financial Service Provider under the clutch of IBC? Nature of the “debt” vs. Nature of the “debtor”
-Megha Mittal
In a first of its kind, the Hon’ble National Company Law Tribunal, Principal Bench at New Delhi (“NCLT”) vide its order dated 04.11.2019[1] in the matter of Apeejay Trust v. Aviva Life Insurance Co. India Ltd., has initiated corporate insolvency resolution process against the Corporate Debtor, despite it being a financial service provider under the Insolvency and Bankruptcy Code, 2016 (“Code”).
In the above pretext, one may recall the order of the Hon’ble National Company Law Appellate Tribunal in the matter of Randhiraj Thakur v. Jindal Saxena Financial Services[2], wherein the Hon’ble Appellate Tribunal upheld that financial service providers shall not fall within the ambit of the Code. The order of the Hon’ble NCLAT in the said matter has been discussed in our articles “NBFCs and IBC- the Lost Connection”[3] and “State of Perplexity- Applicability of IBC on NBFCs”[4].
In this article, the author has made a humble attempt to analyse the order of the Hon’ble NCLT based on its facts, observations and the extant law.
FAQs on Fraud Reporting
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Open in new tab SEBI tightens its norm on resignation of auditors
– Priya Udita
resolution@vinodkothari.com
OVERVIEW
Observing that a lot of statutory auditors of the companies are abruptly resigning before completing their tenure either due to lack of cooperation or lack of information provided by the company, SEBI has taken the matter in its hand to strengthen the norms. Consequently, SEBI issued a Consultation Paper[1] on policy proposals with respect to resignation of statutory auditors from listed entities (‘Paper’) dated July 18, 2019. The Paper discussed the policy proposal with the twin objective of strengthening disclosures to the investors and clarifying the role of the Audit Committee. Our analysis of the Paper can be assessed here.
Based on the policy proposal and public comments, SEBI issued circular on Resignation of statutory auditors from listed entities and their material subsidiaries (‘Circular’)[2] dated October 18, 2019 defining compliance to be followed by the listed entity and its material subsidiary while appointing or reappointing the auditors.
KEY AMENDMENTS
- Applicability:
The Circular is applicable on listed entities and its material subsidiaries. The material subsidiaries can be a listed or an unlisted entity. However, it is interesting to comprehend the applicability of the Circular on the debt listed companies (analysed below in our comment section).
Further, the Circular has come into force with immediate effect from the date of its notification.
- Exception:
The provisions of this Circular is inapplicable in case the auditor disqualified under section 141 of the Companies Act, 2013.
- Compliance for limited review or audit review while appointing or reappointing the auditors:
- Within 45 days from the end of quarter of a financial year- the auditor shall issue the limited review/ audit report for such quarter before resignation.
For Example: if the auditor resigns on May 28, 2019 then the auditor is required to submit limited review of quarter ending on June 30, 2019.
- Resignation after 45 days from the end of a quarter of a financial year- then the auditor shall issue the limited review/ audit report for such quarter as well as the next quarter before resignation.
For Example: if the auditor resigns on August 25, 2019, then the auditor needs to issue limited review/audit report of quarter ending on September 30, 2019 as well as December 30, 2019.
- However, if the auditor has signed the limited review/ audit report for the first 3 quarters of a financial year- then the auditor shall issue the limited review/ audit report for the last quarter of such financial year as well as the audit report for such financial year before the resignation.
- Role of Audit Committee
Though the SEBI (Listing and Disclosure Obligations) Regulation, 2015 (‘SEBI LODR Regulations’) laid down the broad role of the audit committee inter alia the appointment, remuneration of the statutory auditors, but, there was not much for the audit committee to delve once the auditor resigns. Thus, with the intention to further enhance the role of audit committee, SEBI has laid down following procedures:
- For the auditors:
- In case of conflict with the management of the listed entity due to lack of cooperation or non-availability of information, the auditor can approach the chairman of the audit committee of the listed entity.
- Where the auditor proposes to resign, all concerns with respect to the proposed resignation, along with relevant documents should be given to the audit committee.
- Further where the proposed resignation is due to non-receipt of information/explanation from the company, the auditor will have to inform the audit committee of the details of information asked and not provided by the management.
- For the Audit Committee:
- In case of concern raised due to non-availability of information, audit committee must receive such concern directly and immediately without specifically waiting for the quarterly audit committee meetings.
- On receipt of information from the auditor relating to the proposal to resign, the audit committee/board of directors must deliberate on the matter as soon as possible but not later than the date of the next audit committee meeting and communicate its views to the management and the auditor.
- Disclaimer by the auditor:
Where the auditor does not receive the information demanded for the purpose of auditing, an appropriate disclaimer in the audit report must be provided in accordance with the Standards of Auditing as specified by ICAI/NFRA.
- Obligations of the listed entity/material subsidiary
- The listed entity/its material subsidiary are required to ensure that the new compliance is included in the terms of appointment at the time of appointment or reappointment of the auditors. In case of existing auditors, the appointment letter is needed to be modified to give such effect.
- The listed entity/its material subsidiary need to obtain the information about the auditor’s resignation in a format as specified in the Circular. Further, the listed entity has the obligation to ensure disclosure of the same under Sub-clause (7A) of Clause A in Part A of Schedule III under Regulation 30(2) of SEBI LODR Regulations.
- The listed entity/material subsidiary will provide all the relevant document or information as required by the auditor during the period from its proposal to resign and submission of the limited review/audit report.
- The listed entity will disclose the views of the audit committee to the stock exchange as soon as possible and not later than later than twenty four hours after the date of such audit committee meeting.
ANALYSIS
Firstly, we need to understand the current regulatory provisions governing the resignation of the auditors and the need felt by SEBI to issue this Circular.
Section 140(2) of the Companies Act, 2013 along with the Companies (Audit and Auditors) Rules, 2014 mandates the auditor to file a statement in a prescribed form to the company and to the Registrar citing reasons for resignation, within 30 days from the date of resignation. In addition to that, sub-clause (7A) of Clause A in Part A of Schedule III under Regulation 30(2) of the SEBI (LODR) Regulations prescribes that the listed entity shall disclose detailed reasons of the resignation to the stock exchange within 24 hours of such resignation. ICAI’s auditing standards (SA-705) enumerates that in a situation where the possible effects on the financial statements of undetected misstatements are both material and pervasive such that a qualification of the opinion would be inadequate to communicate the gravity of the situation, the auditor can resign. According to the Rule 5 of National Financial Reporting Authority Rules, 2018 (‘NFRA Rules’), every auditor of the entities covered by these rules are required to file an annual return in form NFRA 2 with the authority giving details with respect to the audit as well as resignations given in the past 3 years.
Though the law provided these rules and regulation, the rising trend on abrupt resignations by the auditor citing reason as ‘pre-occupation’ were leaving the investors vulnerable to various threats. Due to resignation of the large audit firms, SEBI was forced to review its listing and disclosure obligations. In order to enhance accountability of auditors and protect the investors from the insecure environment due to abrupt resignation, SEBI felt the dire need to regulate such resignations and took the step in a right direction by issuing this Circular.
OUR COMMENT
The Circular was much needed as the rules governing the resignation of auditors across different forums were inadequate. The Circular, in addition to regulation of abrupt resignation, will give a helping hand to the auditors especially in case of lack of cooperation by the management, if any, faced by them. This will ultimately benefit SEBI to look into the matter for potential fraudulent or vulnerable transactions. Further the enhancing role of the audit committee is commendable.
However, the Circular has few gaps such as the applicability of Circular on debt listed entities. Now, there can be various scenarios. Suppose the listed entity ‘A’ has a material subsidiary ‘B’. The Circular will be applicable where ‘B’ is unlisted but a material subsidiary of ‘A’. The question arises where ‘B’ is a debt listed entity only, whether the Circular will be applicable? In our view, the Circular will be applicable in the instant case since B is a material subsidiary.
Further, it is important to note that the intimation requirements under the Circular are two-fold and both are parallel to each other serving different intents. In the first part, the listed entity has to inform the stock exchange within 24 hours of the resignation as per Sub-clause (7A) of Clause A in Part A of Schedule III under Regulation 30(2) of SEBI LODR Regulations, whereas in the second part the audit committee is required to inform the stock exchange as soon as possible from the date of resignation but not later than date of next audit meeting. The intimation under the second part will carry the views of the audit committee on the concerns raised by the auditor before resignation whereas the intimation under Regulation 30 is an intimation of a material event. We shall be coming out with our set of FAQs on the Circular discussing the same at length from various perspectives.
RBI revises qualifying assets criteria for NBFC MFIs
Team, Vinod Kothari Consultants Pvt. Ltd.
The RBI on November 08, 2019[1] revised the limits relating to the qualifying assets criteria, giving a much needed boost to Micro-Finance Institutions. The change in limits comes pursuant to the Statement on Developmental and Regulatory Policies[2] issued as part of the Monetary Policy Statement dated 04 October, 2019.
A detailed regulatory framework for MFI’s was put into place in December, 2011 based on the recommendations of a Sub-Committee of the Central Board of the Reserve Bank. The regulatory framework prescribes that an NBFC MFI means a non-deposit taking NBFC that fulfils the following conditions:
- Minimum Net Owned Funds of Rs. 5 Crore.
- Not less than 85% of its net assets are in the nature of qualifying assets.
Thus meeting the qualifying assets criteria is crucial to be classified as an NBFC-MFI. The income and loan limits to classify an exposure as an eligible asset were last revised in 2015.
In light of the above and taking into consideration the important role played by MFIs in delivering credit to those in the bottom of the economic pyramid and to enable them to play their assigned role in a growing economy, it was decided to increase and review the limits.
Revised Qualifying assets criteria
The changes are highlighted in the table below:
| Qualifying Assets Criteria | |
| Erstwhile Criteria | Revised Criteria |
| Qualifying assets shall mean a loan which satisfies the following criteria: | |
| i. Loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding ₹ 1,00,000 or urban and semi-urban household income not exceeding ₹ 1,60,000; | i. Loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding ₹ 1,25,000 or urban and semi-urban household income not exceeding ₹ 2,00,000; |
| ii. Loan amount does not exceed ₹ 60,000 in the first cycle and ₹ 1,00,000 in subsequent cycles; | ii. Loan amount does not exceed ₹ 75,000 in the first cycle and ₹ 1,25,000 in subsequent cycles; |
| iii. Total indebtedness of the borrower does not exceed ₹ 1,00,000; | iii. Total indebtedness of the borrower does not exceed ₹ 1,25,000; |
| Note: All other terms and conditions specified under the master directions shall remain unchanged. | |
The Statement on Developmental and Regulatory Policies called for revisions in the household income and loan limits only. The notification of the RBI additionally, in light of the change in total indebtedness of the borrower, felt it necessary to also increase the limits on disbursal of loans.
The revised limits are effective from the date of the circular, i. e. November 08, 2019.
[1] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11727&Mode=0
[2] https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=48318
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