Investments from neighbouring countries under stringent scan of GoI
/0 Comments/in Amendments to the Companies Act 2013, Companies Act 2013, Corporate Laws, MCA /by Staff– 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
/0 Comments/in Companies Act 2013, Corporate Laws, FEMA, MCA /by Staff– 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
/3 Comments/in Amendments to the Companies Act 2013, Companies Act 2013, Corporate Laws, MCA, UPDATES /by Staff-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?
/0 Comments/in Companies Act 2013, Corporate Laws, MCA /by Staff-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.
Read more →MCA amends format of Forms SH-4 and PAS-4 to insert declaration on compliance with Government approval requirement under FEMA
/0 Comments/in Companies Act 2013, Corporate Laws, FEMA, MCA /by StaffWhether a private company can accept deposits from HUF?
/1 Comment/in Companies Act 2013, Corporate Laws /by StaffVinita Nair | corplaw@vinodkothari.com
Provisions of Law
According to Section 2(31) of the Companies Act, 2013 ‘Deposit’ includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India. The exclusions are cited in Rule 2 (1) (c) of Companies (Acceptance of Deposits) Rules, 2014 which are applicable to public and private companies.
Rule 2 (1) (c) (viii) of Deposit rules excludes amounts received from a person who, at the time of the receipt of the amount, was a director of the company or a relative of the director of the private company, provided that the person declares that the amount is his own fund and not borrowed. The private company is required to disclose the details of money so accepted in the Board’s report.
Read more →Guidance note on Disclosure of Related Party Transactions under Reg. 23 (9) of LODR
/0 Comments/in Corporate Laws, LODR, SEBI /by Kaushal ShahApplicability of insider trading regulations to pooled investment vehicles: A discussion on extent and rationale
/0 Comments/in Corporate Laws, PIT, SEBI /by Staff- CS Sikha Bansal, Partner and CS Aisha Begum Ansari, Manager | corplaw@vinodkothari.com
| The article has also been published on IndiaCorpLaw – read here |
Regulatory framework for surveillance of DPs
SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘PIT Regs.’), although prohibit trading on the basis of unpublished price sensitive information (UPSI) by any “insider” (which includes even an accidental insider or an outsider having come to possess UPSI); however, from a surveillance and compliance system perspective, the PIT Regs. focus on certain specific insiders called designated persons (DPs). Trading in securities of the listed company by the DPs is sought to be “regulated, monitored and reported” by the Code of Conduct (reg. 9 read with Schedule B) which, inter alia, provides for (a) bar on trading while the trading window is closed; (b) prior clearance by the compliance officer while the trading window is open subject to certain declarations; (c) bar on short-term reversal trades; etc. Another article deals with a detailed discussion on the manner in which ‘insiders’, ‘connected persons’ and ‘designated persons’ are dealt with under PIT Regs.
Similar framework has been envisaged in case of intermediaries and fiduciaries who deal with listed companies. In such cases, the compliance officer of such intermediary/ fiduciary is required to maintain a ‘restricted list’ of securities, which is used as the basis for approving or rejecting the application for pre-clearance of trades by the DP. The DP may trade in the securities of a listed client company which is not in the restricted list subject to pre-clearance by the compliance officer.
Hence, there is no blanket prohibition of trading in the listed securities by the DPs; although, there are conditionalities involved. Very recently, there have also been concerns around investment by DPs in the units of pooled investment vehicles (as we discuss below).
Read more →CLC recommends major reforms in corporate laws for ease of doing business
/0 Comments/in Companies Act 2013, Corporate Laws /by Staff– MCA’s move to standardise, streamline and digitize
– Payal Agarwal, Senior Executive | Vinod Kothari & Company (payal@vinodkothari.com)
The Report of the Company Law Committee – 2022 (“CLC Report”) has proposed various important amendments to the existing Companies Act, 2013 (“the Act”) and some in the Limited Liability Partnership Act, 2008 (“LLP Act”). The recommendations touch a wide array of elements under the Act – be it the association/ cooling period of directors, auditors, KMPs, etc. or corporate actions such as mergers, transfer of unclaimed monies to IEPF on account of buyback etc., de-clogging of NCLTs for restoration of company’s name after having been dissolved as defunct, setting up of specialized company law Benches of NCLT for dealing with matters of economic importance such as corporate restructuring, and specialized IBC cases or cases involving public interest. The recommendations also seek restoration of some meaningful provisions of the erstwhile CA 1956.While some suggestions pertain to ease of compliances and moving towards digitization with respect to certain compliances of a company, others pertain to building a robust corporate governance framework including alignment of the law with various provisions with SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“Listing Regulations”).
This is the 3rd CLC Report in the series of recommending changes to the 2013 Act, several reforms in the Act had been suggested in past by the CLC Report 2016, Committee to Review Offences Under Act of 2018 and CLC Report 2019. A brief summary of the issues under hand and the recommendations along with proposed amendments have been provided for as an Annexure to the CLC Report itself, and therefore, we find it useful to discuss only some of the recommendations which require analysis.
Applicability
The Committee report, if accepted by the Government, will potentially lead to an Amendment Bill, and therefore, there will be an enactment by a law of the Parliament. Once passed, it is expected that several of the amendments will require extensive rule-making, as there are references in several provisions to “class or classes of companies”. Thus, while we get a broader view of the direction into which the law will move, but as they say, the devil lies in the detail. We will get to know the details, hopefully divine and not devilish, only when the Bill is available for review.
