Ease of doing business: Debt listed companies slide down to unlisted companies

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Companies with listed but privately placed debt paper not to be regulated as ‘listed company’.

FCS Vinita Nair | Senior Partner, Vinod Kothari & Company

With an intent to promote listing of securities and bond market, Ministry of Corporate Affairs (MCA) in consultation with Securities and Exchange Board of India (SEBI), intended to exclude certain class of companies from the definition of ‘listed company’ as defined under Section 2 (52) of Companies Act, 2013 (CA, 2013). The existing provisions of CA, 2013 applicable to a listed company did not distinguish between private companies and public companies. As a result, private companies were unintendedly subject to similar compliance as a public company. A browse through the list of companies with listed privately placed debentures, shows private companies abound in the list[1].  On the other hand, public companies that listed debt securities on a private placement basis, were subject to similar compliances as a public company issuing debt securities to public.

Accordingly, one of major amendments proposed in Companies (Amendment) Act, 2020 (CAA, 2020) was to revisit definition of listed company and provide a suitable carve out to certain class of companies to be determined in consultation with SEBI.

The rationale behind the carve out, as explained in the Report of the Company Law Committee of November, 2019[2] was that private companies listing its debt securities on any recognized stock exchange were subject to more stringent regulations compared to unlisted private companies viz. appointment of auditors, independent directors, woman directors, constitution of board committees etc. that were dis-incentivizing private companies from seeking listing of their debt securities. This was also discussed in the Report of Company Law Committee in 2016[3] wherein the Committee, while acknowledging the anomaly  in the definition of listed company, felt that while the definition of the term ‘listed company’ need not be modified, the thresholds prescribed for private companies for corporate governance requirements may be reviewed. Further, the Committee proposed that specific exemptions under Section 464 of CA, 2013 could also be given to listed companies, other than equity listed companies, from certain corporate governance requirements prescribed in the Act.

Currently, companies issuing non- convertible debt securities (NCDS) or non-convertible redeemable preference shares (NCRPS) on a private placement basis, list the same under SEBI (Issue and Listing of Debt Securities Regulations, 2008 (SEBI ILDS) and SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013 (SEBI ILNCRPS) respectively and are regarded as ‘listed company’ for the provisions of CA, 2013.

Total number of companies with listed debt 

Number of companies, which come under different buckets as per the outstanding value of listed Debt Securities (as per face value) as on December 31, 2020

Present amendment

While the amendment made in Section 2 (52) in the definition of ‘listed company’ was notified with effect from January 22, 2021[4], the class of companies were pending to be prescribed. Ministry of Corporate Affairs (MCA) on February 19, 2021[5] notified Companies (Specification of Definition Details) Second Amendment Rules, 2021 effective from April 1, 2021 to insert Rule 2A excluding following class of companies from the definition of ‘listed company’ under CA, 2013

  1. Public companies with listed NCDS issued on private placement basis in terms of SEBI ILDS;
  2. Public companies with listed NCRPS issued on private placement basis in terms of SEBI ILNCRPS;
  3. Public companies with listed NCDS and NCRPRS issued on private placement basis in terms of SEBI ILDS and SEBI ILNCRPS respectively;
  4. Private companies with listed NCDS in terms of SEBI ILDS.
  5. Public companies with equity shares exclusively listed on stock exchanges in permissible foreign jurisdictions under Section 23 (3) of CA, 2013.

Point to note here is that companies with listed commercial papers were anyways outside the purview of listed companies as commercial papers are excluded from the definition of debentures.

Listed company post amendment

Post amendment, the definition of listed company will mainly comprise of public companies offering securities to public i.e. having listed equity shares in India (with or without ADR/GDR listed overseas), listed debt securities pursuant to public issue or listed NCRPS pursuant to public issue.

Compliances for listed company under CA, 2013

A listed company is required to ensure following additional compliances under CA, 2013:

Amount in Rs/ Other specification Section No. Rule No. Brief of the provision Other thresholds under CA, 2013
1.       Provisions/ exemptions applicable to all listed companies
Exemption for creation of Debenture Redemption Reserve (DRR) 71 18 (7) (b) (iii) (B) of SHA Rules Listed NBFCs need not create DRR for privately placed and public issue of debentures. Refer discussion below
Creation of Debenture Redemption Fund (DRF) 71(4) Rule 18(7)(b)(v) of SHA Rules as amended. No requirement for creation of DRF by listed companies issuing debenture on private placement basis. Refer discussion below
Annual return 92 11 of MGT Rules

 

 Company to file Annual Return certified by a PCS in Form MGT-8 Applicable to Company with

  • Paid-up share capital of Rs. 10 crore or more; or
  • Turnover of Rs. 50 crore or more.
Records in electronic form 120 27 of MGT Rules Company may maintain records in electronic form.

Note: Whether companies other than those specified have the option to maintain in electronic form, is not clear.

 Company having not less than 1000 shareholders, debenture holders and other security holders.
Investigation by NFRA

 

 132 Rule 3(1)(b) of NFRA Rules NFRA shall undertake investigation or conduct quality review of audit.
  • Unlisted public companies
    • having paid-up capital of not less than Rs. 500 crores; or
    • having annual turnover of not less than Rs. 1000 crores or
    • having, in aggregate, outstanding loans, debentures and deposits of not less than Rs. 500 crores as on the 31st March of immediately preceding financial year;
  • insurance companies, banking companies, companies engaged in the generation or supply of electricity, companies governed by any special Act for the time being in force or bodies corporate incorporated by an Act in accordance with clauses (b), (c), (d), (e) and (f) of sub-section (4) of section 1 of the CA, 2013;
Statement in Board report indicating manner of Board evaluation 134(3) 8 (4) of AOC Rules

 

 A statement indicating manner in which formal evaluation of Board, committee and individual directors has been done by Board needs to be included in Board’s report. Public company having a paid up share capital of Rs. 25 crore or more calculated at the end of the preceding financial year.
Financial statements in electronic form 136 11

of AOC Rules

 Financial statements may be sent in electronic format. Public companies which have

  • a net worth of more than Rs. 1 crore; and
  • turnover of more than Rs. 10 crore.
Internal auditor 138 13

of AOC Rules

 Appointment of internal auditor or a firm of internal auditors to conduct internal audit.
  • Every unlisted public company having-
    • paid up share capital of Rs. 50 crore or more during the preceding financial year; or
    • turnover of Rs. 200 crore or more during the preceding financial year; or
    • outstanding loans or borrowings from banks or public financial institutions exceeding Rs. 100 crore or more at any point of time during the preceding financial year; or
    • outstanding deposits of Rs. 25 crore or more at any point of time during the preceding financial year;
  • Every private company having
  • turnover of Rs. 200 or more during the preceding financial year; or
  • outstanding loans or borrowings from banks or public financial institutions exceeding Rs. 100 crore or more at any point of time during the preceding financial year:
Appt/ re-appt of Auditor 139

(2)

 5 of ADT Rules

 

 Restriction on term of appointment or reappointment of auditor. Rotation of Statutory Auditors mandatory.
  • all unlisted public companies having paid up share capital of Rs. 10 crore or more;
  • all private limited companies having paid up share capital of Rs. 50 crore or more;
  • all companies having paid up share capital of below threshold limit mentioned above, but having public borrowings from financial institutions, banks or public deposits of Rs. 50 crores or more.
Woman Director 149

(1)

 3 of DIR Rules

 

 Appointment of a Woman Director on the Board.

 

Any intermittent vacancy of a woman director shall be filled-up by the Board at the earliest but not later than immediate next Board meeting or three months from the date of such vacancy whichever is later.

 Public company having –

  • paid–up share capital of Rs. 100 crore or more; or
  • turnover of Rs. 300 crore or more:
Small shareholder director 151 7 of DIR Rules

 

 May appoint a small shareholder director suo moto or upon notice from shareholder. –
Vigil mechanism 177 7 of MBP Rules

 

 Company to establish vigil mechanism for their directors and employees to report genuine concerns.
  • the Companies which accept deposits from the public;
  • the Companies which have borrowed money from banks and public financial institutions in excess of Rs. 50 crore.
Disclosure in Board’s Report 197

(12)

 5 of MR Rules

 

 Disclosure in Board’s report regarding ratio of the remuneration of each director to the median employee’s remuneration and such other details as prescribed in the Rules. –
Appointment of KMP 203 8 of MR Rules Appointment of whole-time key managerial personnel.

 
  • Public company having a paid-up share capital of Rs. 10 crore or more
  • Additionally for appointment of Company Secretary, every private company which has a paid up share capital of Rs. 10 crore.
Secretarial Audit Report 204 9(2) of MR Rules

 

 Shall annex with its Board’s report  a secretarial audit report, given by a company secretary in practice
  • Every public company having a paid-up share capital of Rs. 50 crore or more; or
  • Every public company having a turnover of Rs. 250 crore or more; or
  • Every company having outstanding loans or borrowings from banks or public financial institutions of Rs. 100 crore or more.
2.       Provisions applicable only to a listed public company
Report on Annual General meeting 121 31 of MGT Rules

 

 Report on AGM to be filed with the Registrar in eForm MGT-15. –
Independent  Director 149

(4)

 4 of DIR Rules

 

 Atleast 1/3rd of total number of Board members shall be independent directors.
  • Public Companies having paid up share capital of Rs. 10 crore or more; or
  • Public Companies having turnover of Rs. 100 crore or more; or
  • Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding Rs. 50 crore
Constitution of certain committees 177 & 178 6  of MBP Rules

 

 Constitution of Audit Committee and Nomination and Remuneration Committee.
  • Public Companies having paid up share capital of Rs. 10 crore or more; or
  • Public Companies having turnover of Rs. 100 crore or more; or
  • Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding Rs. 50 crore

 

With the present amendment, the class of companies provided above will not be required to ensure aforesaid compliances unless it meets other criteria/ thresholds prescribed for respective compliance.

As evident from the table above, a public company will hardly have any exemptions if it meets any of the thresholds specified. While the intent of exempting class of companies is benign, it will be of some benefit to public companies only if the other thresholds are also revised. While, the holy wish is for ease of doing business, static thresholds prescribed in 2013 needs to be revisited to assess the adequacy and the intent to regulate such class of companies. For e.g. public companies having paid up capital of 10 crore or borrowing of Rs. 50 crore is a very common phenomena.

Additionally, in case the sectoral regulator prescribes composition of committee or induction of independent directors or other corporate governance requirement, those will override the exemptions.

Applicability of DRR and DRF[6]

Section 71(4) read with Rule 18(1)(c) of the Companies (Share Capital and Debentures) Rules, 2014 (SHA Rules) requires every company issuing debentures to create a Debenture Redemption Reserve (DRR) of 10% (as the case maybe) of outstanding value of debentures for the purpose of redemption of such debentures.

Some class of companies as prescribed, has to either deposit, before April 30th each year, in a scheduled bank account, a sum of at least 15% of the amount of its debentures maturing during the year ending on 31st March of next year or invest in one or more securities enlisted in Rule 18(1)(c) of SHA (DRF).

Pursuant to the present amendment, it is important to ascertain applicability of creation of DRR and DRF in terms of CA, 2013. The exemption in relation to DRR and DRF was applicable to listed companies in case of private placement. While NBFCs continue to enjoy exemption even in case of unlisted companies, pursuant to the present amendment Non-NBFCs listing NCDS will not be eligible to avail the benefit of the said exemption and will be required to maintain DRR and DRF.

The intent of MCA at the time of amending Rule 18 of Companies (Share Capital and Debentures) Rules, 2014 was to extend the exemption to all listed companies i.e. companies having securities listed on stock exchange, in case of privately placed debentures, from maintenance of DRR and DRF.

The intent behind amending the definition of ‘listed company’ under 2 (52) was to reduce the compliance burden of debt listed entities that were regarded as listed entities merely by virtue of listing the privately placed debentures.

The amendment to the definition of ‘listed company’ was subsequent and the same has resulted in an anomaly as corresponding amendment has not been carried out in Rule 18 of SHA Rules. The intent behind mandating DRR and DRF requirement, in case of private placement, was for unlisted companies with unlisted debt and not for unlisted companies with listed debt.

This is surely a matter of representation to be made to MCA as the gap seems inadvertent and not intentional.

Applicability of Rule 9A of PAS Rules

Section 29 of CA, 2013 read with Rule 9A of Companies (Prospectus and Allotment of Securities) Rules, 2014 (PAS Rules)[7] effective from October 2, 2018 mandates unlisted public companies to issue the securities only in dematerialised form and facilitate dematerialisation of all its existing securities. Physical transfer of securities is prohibited for unlisted public companies. Compliance with the said provisions are exempt only in case of a Nidhi, Government company and wholly owned subsidiary.

Pursuant to amendment in the definition of listed company, public companies that were originally exempted from the requirements by virtue of being a listed company, will now be required to comply with Section 29 and Rule 9A.

Status under Listing Regulations and SEBI ILDS

‘Listed entity’ as defined under Reg. 2 (p) of SEBI (Listing Obligations and Disclosures Requirements) Regulations, 2015 (Listing Regulations) means an entity which has listed, on a recognised stock exchange(s), the designated securities issued by it or designated securities issued under schemes managed by it, in accordance with the listing agreement entered into between the entity and the recognised stock exchange(s).

The present carve out under CA, 2013 will not result in any carve out for compliances under Listing Regulations as Listing Regulations anyways provides separate set of compliances equity listed companies (Chapter IV) and only NCDS/NCRPS listed companies ( Chapter V) and those with equity and debt listed (Chapter VI).

Further, SEBI Circulars issued from time to time under SEBI ILDS are addressed to all listed entities who have listed their debt securities or issuers who propose to list their debt securities.

Status under PIT Regulations

SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations) does not define the term ‘listed company’, however, applies to listed company and securities of an unlisted company proposed to be listed. The definition of ‘proposed to be listed’ is as hereunder:

“proposed to be listed” shall include securities of an unlisted company:

(i) if such unlisted company has filed offer documents or other documents, as the case may be, with the Board, stock exchange(s) or registrar of companies in connection with the listing; or

(ii) if such unlisted company is getting listed pursuant to any merger or amalgamation and has filed a copy of such scheme of merger or amalgamation under the Companies Act, 2013.”

The term ‘listed company’ is not being defined under PIT Regulations and therefore, the definition under CA, 2013 should be referred pursuant to Reg. 2 (2) of PIT Regulations[8].  In that case, PIT Regulations will apply only in case of securities issued by a listed company or a company that is proposed to become a ‘listed company’. Accordingly, only debt/ NCRPS listed companies need not comply with requirements of PIT Regulations. SEBI should consider furnishing a clarification in this regard.

However, that is not the intent of law. If a security is listed, its price is subject to change and be impacted by price sensitive information. Accordingly, such exclusively debt/ NCRPS listed companies, on account of private placement of securities, should continue to comply with the requirements of PIT Regulations. SEBI may also consider furnishing a clarification in this regard.

Conclusion

While, the present amendment expands the originally envisaged carve out for private companies to public companies as well, given the other static thresholds prescribed under CA, 2013 public companies have little reason to rejoice. Exemption to comply with PIT Regulations may be a huge relief, however, there is a need for SEBI to clarify the position given the intent of law.

Further, it is very crucial that MCA revisits DRR and DRF related provision for privately placed NCDS and consider to relax the same especially for the benefit of Non-NBFCs. Lastly, suitability of the exemption in case of companies exclusively listed in foreign jurisdiction will be required to be evaluated after a certain lapse of time as the provisions have been recently inserted in CA, 2013.

 

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https://vinodkothari.com/category/corporate-laws/

Our  our Book on Law and Practice Relating to Corporate Bonds and Debentures, authored by Ms. Vinita Nair Dedhia, Senior Partner and Mr. Abhirup Ghosh, Partner can be ordered though the below link:

https://www.taxmann.com/bookstore/product/6330-law-and-practice-relating-to-debentures-and-corporate-bonds

 

[1] https://www.bseindia.com/markets/debt/debt_instruments.aspx?curpage=4&select_alp=all&select_ord=1

[2] Ministry of Corporate Affairs, Government of India, ‘Report of the Companies Law Committee’

(November 2019) para 2.

[3] Ministry of Corporate Affairs, Government of India, ‘Report of the Companies Law Committee’

(February 2016) para 1.13.

[4] http://www.mca.gov.in/Ministry/pdf/CommencementNotification_23012021.pdf

[5] http://egazette.nic.in/WriteReadData/2021/225287.pdf

[6] Refer our write up ‘Easing of DRF’ and ‘Provisions relating to DVR & DRR- stands amended’ by CS Smriti Wadehra.

[7] Discussed in our write up ‘Physical to Demat: A move from opacity to transparency’.

[8] Words and expressions used and not defined in these regulations but defined in the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Securities Contracts (Regulation) Act, 1956 (42 of 1956), the Depositories Act, 1996 (22 of 1996) or the Companies Act, 2013 (18 of 2013) and rules and regulations made thereunder shall have the meanings respectively assigned to them in those legislation.

LLPs slated for more stringent reforms

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Significant provisions of the Act made applicable on LLPs

Payal Agarwal| Senior Executive| Vinod Kothari and Company

Last updated – 27th June, 2022

Introduction                          

Limited Liability Partnerships (LLPs) being a hybrid form of entity with characteristics of both companies as well as partnerships are governed by the provisions of Limited Liability Partnership Act 2008 (“LLP Act”).  LLPs are popular since due to less compliance requirements as compared with a company.

In view of the existing framework for LLPs, the Ministry of Corporate Affairs (MCA) had published a news material on its website on 18th February 2021 stating that certain provisions of the Companies Act 2013 (“the Act”) will be soon made applicable on the LLPs. The same has been made effective vide a notification dated 11th February 2022 (“Amendment Notification”). The notification specifies certain sections of the Companies Act, 2013 which shall also be applicable on LLPs. These include some very significant provisions like identification of Significant Beneficial Ownership (SBO), application of the criteria for disqualification, capping on the max number of partners/ DPs, etc.

The provisions are applicable immediately from the date of the notification itself, and will require the LLPs to review their existent position to conform that they remain compliant of the provisions newly made applicable on the same.

Intent behind the amendments

LLPs are seen to be entities having less regulatory supervisions and more benefits of the corporate forms of entities. Therefore, conversion of companies into LLPs can be sought as a means of regulatory arbitrage. However, it has to be noted that the regulatory authorities are now set to bring LLPs under the ambit of some stricter supervision. The Company Law Committee Report on Decriminalization of LLP Act also indicated that the attention of the regulatory authorities are now shifted towards the LLPs. Our write up on the same can be read here. In India, mostly the professional service providers such as law firms, practising professionals etc. are formed as LLPs. Also, the AIFs are mostly formed as LLPs. In the aforesaid report too, fund raising by way of issue of Non-Convertible Debentures (NCDs) by the LLPs were barred except for the entities regulated by SEBI or RBI. So, the intent of the Government seems to monitor the activities of LLPs.

Discussion on the changes

The specified provisions of the Act have mostly been made applicable to the LLPs, as it is under the Act, with substitution of the terms “member” with “partner”, “director” with “Designated Partner” and “company” with “LLP”, save as otherwise expressly provided below. The tabular presentation below discusses the requirements of the provisions which have been made applicable on the LLPs along with our analysis on each of them.

Sec No.Deals withRequirements of the Act made applicable to LLPsImpact analysis and immediate actionable
90 except sub-section (12)Significant Beneficial Ownership (SBO)-Declaration of beneficial interest by SBO( 25% or more interest or as specified in the Rules)  
-Company shall maintain register of SBO  
-Inspection of such register by members   Co. shall file return of SBO with ROC  
-Co. shall take necessary steps for identification of SBO  
-Notice by co. to persons who are likely to be/have knowledge of/ were SBO and not registered.  
-Info to be given by concerned person within 30 days of notice  
-Co. shall apply to Tribunal within 15 days if info not provided by the concerned person  
-Tribunal may restricts rights on such shares relating to concerned persons after reasonable opportunity of hearing.  
-Aggrieved person may apply for lifting/ relaxation of such orders   Punishment on contravention  		While this provisions have been made applicable on LLPs, there could be various points to discuss so that the impact can be analysed. Some of these include:  
-The Act intends to identify a natural person controlling or exercising beneficial interest on the company. Under an LLP, the ownership and management need not be different as in the case of companies. LLPs can have partners of various categories like Limited Partner (one who only contributes capital) and General Partner (one who manages the LLP). As we understand, the intent behind introducing the SBO identification for LLPs should be similar to that for companies, i.e. to understand the beneficial owner. The Amendment Notification does not differentiate between the various categories of Partners and include both for the purpose of determination of SBO.  
-From here, we move to the next point for discussion, i.e. the meaning of beneficial interest. Section 89 of the Act defines beneficial ownership. Again, it has to be seen that the word “Significant” is defined under Section 90(1) to mean an interest of 25% or more or such other proportion as prescribed in the Rules. Currently, the same has been prescribed at 10%.   Following the Amendment Notification, the LLP Amendment Rules have also been prescribed, however, no similar thresholds have been provided with respect to SBO as given under the Companies Rules.    
-Further, sub-section (12) has not been made applicable on account of the fact that it relates to punishment under Section 447 of the Act.  
-The amendments will broadly require the LLPs to – Identify the SBO Take declarations from SBO Maintain register of SBO  
164(1) and (2)Disqualification of DirectorsCannot be a Director if –
-Declared unsound mind
-Undischarged insolvent
-Applied to be adjudicated as insolvent
-Convicted and sentenced imprisonment of 6 months or more and 5 years has not elapsed yet from release ( If sentenced for 7 years or more, permanently disqualified)
-Disqualified by an order of Court or Tribunal
-Not paid calls in respect of shares held by him for atleast 6 months from last day fixed for payment of call
-Convicted of offence dealing with RPT u/s 188 during last 5 years
-Not complied with Section 152(3)
-Not complied with Section 165(1)   —

Cannot be appointed in any other co./ re-appointed in that co. for 5 years from the date of failure if is/has been a Director of a co. which has  
-Not filed financial statements/annual returns for 3 consecutive FYs.
-Failed to repay deposits/debentures/pay interest thereon/ dividend declared for 1 year or more		-The grounds of disqualification of Directors under the Act has been made applicable to the Designated Partners of LLPs as well.
-The various grounds for disqualification are linked with certain personal defaults and filing defaults.   An interesting observation with respect to the Amendment is that, for the purposes of sub-section (2), a person being the “director” in a defaulting “company” is also disqualified to act as a Designated Partner in LLP, however, no similar amendments have been made in the Act to make the DPs of a defaulting LLP disqualified from acting as a director in a company.
-The provisions being applicable immediately, there is a need to review the existing DPs in light of the disqualification factors so as to ensure that none of the DPs are disqualified from holding office as such.    
165 except sub-section (2)Number of DirectorshipsMax no. of directorships- 20
-Of which public cos. – max 10
-Dormant co. not included

Person holding directorships above specified limit shall within 1 year of commencement of Act-
-Choose to continue in companies within specified limit
-Resign from other companies
-Intimate his choice to the companies and the ROC

-Resignation under (3)(b) will become effective immediately from despatch of notice to the co.
-No person can hold excess directorship –

Once he resigns from the extra companies or
Expiry of 1 year from commencement, whichever is earlier

-Penalty in case of violation        		-By making this section applicable on LLPs, an upper cap has been put on the maximum number of LLPs in which a person can hold the position as a DP.    
-The DPs have been provided with a timeline of one year within which any person holding office as a DP in more than 20 LLPs is required to choose the ones where he intends to continue and resign from the other LLPs. He is also required to provide an intimation to that effect to the LLPs as well as the Registrar having jurisdiction over such LLPs.  
-In case of violation, the DPs may be liable to fine ranging from Rs. 5,000 upto Rs. 25,000.
167 except sub-section  (4)Vacation of office by DirectorOffice of Director becomes vacant when
-Incurs disqualifications under Section 164
-Contravention of Section 188Fails to disclose interest u/s 184
-Disqualified by an order of Court/Tribunal
-Convicted and sentenced for imprisonment of 6 months or more
-Removed in pursuance of this Act
-Punishment on violation  
-Where all Directors vacate, the promoter ( CG in his absence) shall appoint required number of Directors till appointment of Directors in GM  		On account of disqualification incurred, the DPs will be required to vacant their positions. Where all the DPs vacate office in pursuance of section 164, the partners, or, in their absence, the Central Government shall appoint DPs to meet the minimum requirements of law.    
206(5)InspectionThe Central Government may, if it is satisfied that the circumstances so warrant, direct inspection of books and papers of a company by an inspector appointed by it for the purpose.Powers of inspection into the affairs of LLP has been given to Central Government by way of inclusion of these provisions under the LLP Act.   It is to be noted that powers of investigation already lies with the Central Government under Chapter IX of the LLP Act.
207(3)Conduct of Inspection and InquiryNotwithstanding anything contained in any other law for the time being in force or in any contract to the contrary, the Registrar or inspector making an inspection or inquiry shall have all the powers as are vested in a civil court under the Code of Civil Procedure, 1908, while trying a suit in respect of the following matters, namely:— (a) the discovery and production of books of account and other documents, at such place and time as may be specified by such Registrar or inspector making the inspection or inquiry; (b) summoning and enforcing the attendance of persons and examining them on oath; and (c) inspection of any books, registers and other documents of the company at any place.Necessary powers with respect to the conduct of inspection and inquiry has been vested upon the concerned officer by way of these provisions.
252Appeal to Tribunal against strike-off-Agg person against order of ROC dissolving a company, may appeal to Tribunal within 3 years to get the name restored
-ROC may also file app. for restoration if satisfied that name struck off on incorrect particulars
-Tribunal’s order filed with ROC within 30 days to restore name
-Company, its member, creditor, or workman, if aggrieved, can apply to Tribunal within 20 years of striking off order.		The striking off of LLPs are governed by Section 75 of the LLP Act read with Rule 37 of the LLP Rules.   The inclusion of the given provision will provide a way for restoration of LLPs whose names were struck off.   The time period of 20 years for an application for restoration of name has been reduced to 5 years in case of LLPs.  
439Non-cognizable offences-Notwithstanding CrPC, every offence under this Act shall be deemed to be non-cognizable
-No court shall take cognizance unless complaint made by ROC, a shareholder or member of company, or person authorised by CG
-Personal appearance of ROC, or person auth. by CG not necessary unless Court requires the same
-The provisions of (2) shall not apply on actions taken by liquidator on any offence during winding up.		Section 212(6) of the Act provides that only those offences that are covered under Section 447 of the Act are cognizable.   Section 447 of the Act dealing with fraud is not recognised under the LLP Act.   This renders a non-cognizable nature to the offences of the LLP.   No court will be able to take cognizance of any offence by an LLP or its partners/DPs unless complaint is made by some specified persons, such as Registrar, or any person authorised by Central Government.   This may be said to be in furtherance of the Report on Decriminalization of offences of LLPs.    

Conclusion

The provisions of the Act that have been incorporated under the LLP Act is likely to cause a wide-spread effect The provisions of the Act have been made applicable immediately, without providing any preparatory time to the LLPs. The amendments result into an increased level of supervision and control on the working and management of the LLPs. The integration of various provisions of the Act with the LLPs indicate an era of LLPs becoming similar with companies.

Our related resources on the topic:

  1. MCA paves way for e-adjudication of penalties, extends C-PACE for LLPs strike off

Extending provisions of the Companies Act, 2013 to Limited Liability Partnerships

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Vinod Kothari and Company

corplaw@vinodkothari.com

As per MCA news and updates certain provisions of Companies Act, 2013 (“CA, 2013”) will now be extended to Limited Liability Partnerships (“LLPs”). Below is a snippet covering  list of provisions of CA, 2013 extended to LLPs.

Understanding the borderline between implementing agencies and beneficiaries

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Sikha Bansal, Partner and Payal Agarwal, Executive

corplaw@vinodkothari.com 

Introduction

Read more →

RBI directs NBFCs to limit fresh investments from FATF non-compliant jurisdictions to 20% of voting rights

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Our article as published in moneylife can be accessed through the link below:

https://www.moneylife.in/article/nbfcs-asked-to-limit-fresh-investments-to-20-percentage-of-voting-rights-from-fatf-non-compliant-jurisdictions/62964.html

Snapshot of Companies (Share Capital and Debentures) Amendment Rules, 2021

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Vinod Kothari & Company

corplaw@vinodkothari.com

Below is a short snippet on Companies (Share Capital and Debentures) Amendment Rules, 2021.

Maharashtra Stamp Act amended to clarify legal stand in case of mortgage deeds executed for distinct transactions

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The Ordinance additionally plugs gaps on differential rates in case of different mortgages

Aanchal Kaur Nagpal

aanchal@vinodkothari.com

Introduction –

Stamp duty computation, especially in case of complex transactions involving multiple transactions being given effect vide a single instrument, received the sanctity of Hon’ble Supreme Court (SC) in a landmark judgement in case of Controlling Revenue Authority v. Coastal Gujarat Power Ltd[1], where the SC upheld payment of separate stamp duty for different transactions involved interpreting Section 5 of Gujarat Stamp Act, 1958. Following the said judgement, Maharashtra stamp authorities rolled out a circular on September 28, 2015 informing the stand taken by SC; however, no amendment was carried out in Maharashtra Stamp Act, 1958.

Further, it was observed by the stamp authorities that in view of rate difference in case of stamp duty on equitable mortgage (mortgage by deposit of title deeds) as per article 6 (1) and simple mortgage as per article 40, parties played about the same in the instruments thereby creating difficulties in adjudication of amount of proper stamp duty chargeable for them.

The Maharashtra Stamp (Amendment and Validation) Ordinance, 2021 (‘Ordinance’) dated 9th February, 2021 amends Maharashtra Stamp Act, 1958 (‘Stamp Act’) to fill several gaps in the aforementioned provisions. The same have been discussed below –

Arbitrage in rate of stamp duty levied on equitable mortgage and simple mortgage –

Levy of stamp duty in case of mortgage is under the state list and thus the same will be governed by the respective state acts. In case of Maharashtra, the stamp duty chargeable in case of an equitable mortgage is less than that in case of a simple mortgage. Taking advantage of the said arbitrage, mortgage documents have been drafted in such a way that, even though the nomenclature of the document indicates an equitable mortgage, it attempts to cover even a simple mortgage. Thus, simple mortgages are disguised to indicate an equitable mortgage just to pay a lesser stamp duty.  Such documents create difficulties in adjudication of amount of proper stamp duty.

Further, certain towns had been notified by the State of Maharashtra under the Transfer of Property Act to enable execution of agreement relating to an equitable mortgage. However, in cases of towns not notified, a person was forced to opt for execution of simple mortgage deed instead of an equitable mortgage, where stamp duty is higher in case of the former.

Owing to the above, the Act has been amended in order to align the stamp duty chargeable on the instruments of an equitable mortgage and simple mortgage deed under the articles 6 and 40, respectively.

Particulars Erstwhile stamp duty Amended stamp duty Remarks
Mortgage by deposit of title deeds under article 6(1) of schedule I If amount secured by the deed is more than Rs. 5 lakhs, rate of stamp duty is 0.2% of the secured amount.

 

 If amount secured by the deed is more than Rs. 5 lakhs, rate of stamp duty is 0.3% of the secured amount.

 

 Rate of stamp duty has been increased from 0.2% to 0.3% in case of secured amount above Rs. 5 lakhs.

 

In case of secured amount below 5 lakhs, rate of stamp duty has not been changed.

 
Pledge, hypothecation of movable property under article 6(2) of schedule I If amount secured by the deed is more than Rs. 5 lakhs, rate of stamp duty is 0.2% of the secured amount.

 

 If amount secured by the deed is more than Rs. 5 lakhs, rate of stamp duty is 0.3% of the secured amount.

 

 Rate of stamp duty has been increased from 0.2% to 0.3% in case of secured amount above Rs. 5 lakhs.

 

In case of secured amount below 5 lakhs, rate of stamp duty has not been changed.

 
Simple mortgage under article 40(b) of schedule I

 

When possession is not given or agreed to be given as aforesaid.

 

 0.5% of the amount secured by such deed.

Minimum duty – Rs. 100

Maximum duty – Rs. 10 lakhs

 If the amount secured – less than Rs. 5 lakhs –0.1% of the amount secured. Minimum – Rs. 100.

 

If the amount secured is more than Rs. 5 lakhs – 0.3% of the amount secured. Maximum- Rs 10 lakhs

 

 While the minimum and maximum amount of stamp duty has been kept the same, the ad valorem rate of duty has been divided into two instances.

 

Amendments to stamp duty rates will be effective from the date of the notification i.e. 9th February, 2021.

Wordplay between ‘matters’ and ‘transactions’ under section 5 –

Stamp duty is chargeable on an instrument rather than a transaction. However, the Finance Act, 2019 drew an exception to this principle in case of stamp duty on securities’ transactions, particularly in case of securities in demat form. Nevertheless, the general rule remains the same.

However, there can be a case where a single instrument embodies various matters. Section 5 of the Act deals with stamp duty in case of such instruments relating to several matters. As per the existing section, ‘any instrument comprising or relating to several distinct matters shall be chargeable with the aggregate amount of the duties with which separate instruments, each comprising or relating to one of such matters, would be chargeable under this Act.’

Therefore, if an instrument consists of various matters, stamp duty will be charged on such matters separately as would have been the case if such matters were executed under separate instruments. However, a lot of debates arose on what would ‘matters’ include- whether matters would only be restricted to ‘matters’ or would include ‘transactions’ as well.

The Gujarat Stamp Act, 1958, was amended to include instruments consisting of distinct transactions along with distinct matters.

The above question was also raised before the Gujarat High Court, where the Court held that that the stamp duty was payable on the instrument and not on the transactions. The High Court opined that there being only one instrument creating a mortgage by borrower in favour of the Security Trustee and since the relationship between the borrower and the Security Trustee is independent of relationship between the borrower and the lending Banks, the High Court took the view that the instrument did not involve either distinct matters or distinct transactions.

However, the Supreme Court held an opposing view  in Controlling Revenue Authority v. Coastal Gujarat Power Ltd[2], where it adjudged that instruments under section 5 of the Gujarat Stamp Act would also include instruments containing distinct transactions.

The question before the Court was whether a single mortgage executed in favour of a
the security trustee for the benefit of several syndicated lenders would be treated as a single document or as multiple documents (equivalent to the number of syndicated lenders).

The Supreme Court concluded that the agreement shall be construed separately for each syndicated lender and stamped as such (i.e. multiple documents). It was opined that

It appears from the trustee document that altogether 13 banks lent money to the mortgagor, details of which have been described in the schedule and for the repayment of money, the borrower entered into separate loan agreements with 13 financial institutions. Had this borrower entered into a separate mortgage deed with these financial institutions in order to secure the loan there would have been a separate document for distinct transactions. On proper construction of this indenture of mortgage it can safely be regarded as 13 distinct transactions which falls under Section 5 of the Act.

The above view was also taken under The Member, Board of Revenue v. Arthur Paul Benthall, 1955 SCR 84[3].

Similar question was raised before the Bombay High Court in Navi Mumbai SEZ Pvt. Ltd. v. The State of Maharashtra & Ors.[4], where it was contended that a perusal of the two statutes (Gujarat Stamp Act and the Act) would evince that the difference between the two is that whereas in the Gujarat Act the phrase ‘or distinct transactions’ follows the phrase ‘several distinct matters’ at two places where the said phrase exists, in the Maharashtra Act the said phrase ‘or distinct transactions’ does not occur.

It was highlighted that section 5 of the Indian Stamp Act, 1899 is in pari materia with Section 5 of the Stamp Act in the State of Maharashtra. Further, the Bombay High court quashed the argument that the decision of the Supreme Court in Coastal Gujarat Power Limited’s case (supra) would not be binding while interpreting Section 5 of the Stamp Act in Maharashtra for the reason the phrase ‘distinct matters’ is equivalent to the phrase ‘distinct transactions’. The names are different but the two are identical.

The Court took guide of the judgement of the Madras High Court in The Board of Revenue, Madras v. Narasimhan & Anr.[5], AIR 1961 Mad 504, (1961) 2 MLJ 538, where it was held that that where more than one of the matters or things i.e. indentures, leases, bonds or deeds, thereby charged with any stamp duty should be engrossed on one piece of vellum, the duties should be charged on every one of such matters. For example, if several landlords, each severally interested in the piece of land mentioned against his name in the Schedule were to act collectively, the instrument would be chargeable with stamp duty by treating each underlying transfer of interest and then aggregating the amount of duties as would be chargeable if separate instruments were executed.

The Madras High Court in The Board of Revenue, Madras v. Narasimhan & Anr., pertaining to a document which was a multi-purpose document or multifarious document, held that the expression ‘distinct matters’ connotes ‘distinct transactions’ and for the purposes of levy of stamp duty under the Indian Stamp Act requires the identity of the parties in respect of the underlying transaction. The importance of the said decision is that the expression ‘distinct matters’ was treated to be the same as ‘distinct transactions’.

The Allahabad High Court in Ram Sarup v. Toti & Anr.[6] AIR 1973 P H 329, with reference to Section 5 of the Indian Stamp Act, 1899 also held that the expression ‘distinct matters’ is equivalent to ‘distinct transactions’.

As per Halsbury’s Law of England, 4th edition, volume 44, paragraph 613 at page 399:-

  1. Instrument relating to several matters. Except where there is statutory provision to the contrary, an instrument containing or relating to several distinct matters is to be separately charged, as if it were a separate instrument, with stamp duty in respect of each of the matters, and an instrument made for any consideration in respect of which it is chargeable with ad valorem duty, and also for any further or other valuable consideration, is separately chargeable, as if it were a separate instrument, in respect of each of the consideration.”

Therefore, to bring the provisions in line with the Gujarat Stamp Act and the Supreme Court Order, the Ordinance amends section 5 of the Stamp Act to include distinct transactions as well to bring absolute clarity. Thus, the amended section is as below –

Instruments relating to several distinct matters or transactions –

Any instrument comprising or relating to several distinct matters or transactions shall be chargeable with the aggregate amount of the duties with which separate instruments, each comprising or relating to one of such matters or transactions, would be chargeable under this Act.

The amendment to section 5 has been made effective retrospectively from 11th July, 2015, i.e. from the date of the decree of the Supreme Court.

What does ‘distinct’ matter/ transaction mean?

The term distinct does not refer to matters or transactions that are totally different in nature. Transactions even of similar nature will be covered under section 5 as long as they are different in nature. The Supreme Court In Coastal Gujarat (supra) also held that section 5 deals only with the instrument which comprises more than one transaction and it is immaterial  for the purpose whether those transactions are
of the same category or of different categories. It was immaterial for the purpose whether the underlying transactions are of the same category or of different categories.

Stamp duty on instrument for additional security

The Ordinance has also added a new clause under article 6 which provides stamp duty in case of any instrument in the form of an equitable mortgage, pledge or hypothecation, which will be executed as a collateral or auxiliary or additional security and where the proper duty has been paid on the principal or primary security under the said article. Stamp duty in such cases will be a flat amount of Rs. 500 irrespective of the amount of security.

Similar provision already exists under article 40, where every instrument executed as a collateral or auxiliary or additional security, where stamp has already been paid on the principal security, is chargeable with a stamp duty of Rs. 200.

Impact on debentures secured by a mortgage or hypothecation

The Finance Act, 2019 inserted section 4(3) in the Indian Stamp Act, 1899, which provides that –

Notwithstanding anything contained in sub-sections (1) and (2), in the case of any issue, sale or transfer of securities, the instrument on which stamp-duty is chargeable under section 9A shall be the principal instrument for the purpose of this section and no stamp-duty shall be charged on any other instruments relating to any such transaction.

Thus, there lies an exemption if issue of securities is charged with stamp duty, then any other instrument relating to such transaction will be exempt to stamp duty. The exemption was erstwhile specifically mentioned in case of debentures secured by way of a mortgage deed, where stamp duty on debentures was exempt if the same had been paid on the mortgage deed. On an understanding of the exemption, in case secured debentures have been allotted against a collateral in the form of a mortgage deed, stamp duty may be paid only at the time of issue of debentures on the allotment list (principal instrument) providing for allotment of secured debentures and not on the security deed. However, companies do not avail this benefit and pay stamp duty on both the transactions/ matters considering it as distinct transactions.

Thus, increase in stamp duty on mortgage deed/ hypothecation may not have an impact on issue of debentures in demat mode due to exemption under section 4(3). However, section 4(3) does not make reference to section 9B (issue of securities in case of physical securities/ debentures) and thus the exemption may not be enjoyed by such debentures and they would feel the burden of the additional stamp duty on the security documents. (Maharashtra Stamp Act will not apply since levy of stamp duty in case of debentures is governed by the Central List and therefore Indian Stamp Act).

Validation clause

The Ordinance also clarifies that any stamp duty paid under section 5 and articles 6 and 40 of schedule I in accordance with any decree/judgement, will be deemed to be validly levied and collected as if the said provisions as amended by the Ordinance were continuously in force. Any suit or proceedings initiated against the stamp authorities for refund of excess stamp duty paid and no court can direct refund of such excess duty.

Conclusion –

These amendments to the Stamp Act mainly relate to stamp duty in case of mortgage deeds, executed in case of consortium lending as a single instrument.

  • The law now explicitly provides that in case of a common instrument consisting of multiple transactions, such transactions should be levied with separate stamp duty. This will have an impact on instruments where stamp duty is paid in the following manner–
  • Where stamp duty is of a fixed amount on an instrument – since the transactions will be charged as separate instruments, the amount of stamp duty will be multiplied by the number of transactions,
  • Where stamp duty is on an ad valorem basis along with a maximum cap,

This will not have an impact where the rate of stamp duty is on an ad valorem basis with no maximum cap since the amount of stamp duty will any way be calculated on the total value of secured amount. However, making the amendment to section 5 effective retrospectively seems oppressive and burdensome to parties of such instruments. In case the instruments are not stamped in accordance with the said provisions, it may be required to be impounded before admitting as an evidence, where required.

  • Rates in case of equitable and simple mortgage have been aligned to prevent taking undue advantage of loopholes. Also, it will now be favourable for parties to execute a simple mortgage over an equitable mortgage since the former not only can be executed in all areas and not just in notified towns but also is a better mode of security.
  • However, stamp duty in case of additional collateral has been kept at a low rate of Rs. 500. Further, in case of multiple securities for a single loan, securities in the form of a pledge/ pawn/ equitable mortgage and such other securities under section 6, may be termed as additional security.

[1] https://indiankanoon.org/doc/178953244/

[2] https://indiankanoon.org/doc/178953244/

[3] https://indiankanoon.org/doc/1553487/

[4]https://bombayhighcourt.nic.in/generatenewauth.php?bhcpar=cGF0aD0uL3dyaXRlcmVhZGRhdGEvZGF0YS9jaXZpbC8yMDE5LyZmbmFtZT1XUDIwMDg5MTkxMTA5MTkucGRmJnNtZmxhZz1OJnJqdWRkYXRlPSZ1cGxvYWRkdD0xNi8wOS8yMDE5JnNwYXNzcGhyYXNlPTExMDIyMTE1MTUwMg==

[5] https://indiankanoon.org/doc/1937173/

[6] https://indiankanoon.org/doc/1046533/

 

Our other resources on similar topic –

  1. https://vinodkothari.com/2020/11/sebis-stringent-norms-for-secured-debentures/
  2. https://vinodkothari.com/2020/07/amendments-in-the-stamp-act-issues-and-need-for-further-clarification/

SEBI aligns disclosure formats with amended PIT Regulations

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Carries out certain clarificatory modifications.

By CS Aisha Begum Ansari, Assistant Manager, Vinod Kothari & Company aisha@vinodkothari.com

 

Securities and Exchange Board of India (‘SEBI’) had specified the formats for disclosures under Regulation 7 of SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘PIT Regulations’) on 11th May, 2015[1] and thereafter revised the formats on 16th September, 2015[2].

SEBI has revisited the formats and carried out further modifications to align the format with amendments in the PIT Regulations and certain edits for clarification purpose, vide circular dated 9th February, 2021[3] with immediate effect.

This article provides a gist of the amendments carried out in the formats. Before discussing the amendments, a brief synopsis of various disclosure requirements under regulation 7 of PIT Regulations is as under:

Form Relates to Applicable to Disclosure requirement Time limit
Form B Initial disclosure KMP/ director/ promoter/ member of the promoter group Disclose the holdings in the company as on the date of appointment or becoming a promoter Within 7 days of appointment or becoming a promoter
Form C Continual disclosure Promoter/ member of the promoter group/ designated person/ director Disclose the number of securities traded, if the value of securities traded exceeds Rs. 10 lakhs in a calendar quarter (whether in one transaction or series of transactions) Within 2 trading days of such transaction.

 

 
Form D (Indicative format) Disclosure by Connected Person (event based) Other connected persons Disclose the holdings and trading in the securities of the company As determined by the company

Details of amendment in the formats

The major amendments in the revised formats under PIT Regulations are as under:

Form Field in the Form Erstwhile format Revised format Remarks
Form B Field w.r.t. “Category of Persons” The details were sought from promoters, directors, KMPs and such other person mentioned in regulation 6(2) The details will be sought from promoters, members of the promoter group, directors, KMPs, immediate relatives and such other person mentioned in regulation 6(2) Members of the promoter group is added in the revised format to align with regulation 7.
Form C

 

 Field w.r.t. “Category of Persons” The details were sought from promoters, directors, employees and such other person mentioned in regulation 6(2) The details will be sought from promoters, members of the promoter group, designated persons, directors, immediate relatives and such other person mentioned in regulation 6(2) Members of the promoter group and designated persons are added in the revised format to align it with regulation 7.
Form C Newly inserted: Note (ii) under sub-heading-1[4] No particular note regarding value of transaction The note explains that the value of transaction excludes taxes, brokerage and any other charges. Regulation 7(2)(a) of the Regulations states that the concerned person is required to give disclosure, if the value of the securities traded exceeds Rs. 10 lakhs in a calendar quarter.

 

The note is provided to clarify that the value of securities is exclusive of taxes, brokerage and other charges.
Form D Newly inserted: Note (ii) under sub-heading-1[5] No particular note regarding value of transaction The revised format defines the value of transaction which excludes taxes, brokerage, any other charges. Regulation 7(3) of the Regulations states that the connected person is required to give disclosure as and when required by the company.

 

The note is provided to clarify that the value of transaction to be disclosed should be exclusive of taxes, brokerage and other charges.
Form B, C and D

 

 Sub-field w.r.t “Type of Security” under the following Fields:

a.           Securities held prior to acquisition/ disposal

b.          Securities acquired/ disposed

c.           Securities held prior to acquisition/ disposal

 The format sought the details of the following securities:

a.       Shares

b.       Warrants

c.       Convertible debentures, etc.

 Details will be now sought for the following securities:

a.       Shares

b.       Warrants

c.       Convertible debentures

d.       Rights entitlements, etc.

 SEBI, vide circular dated 22nd January, 2020[6], introduced the concept of dematerialized rights entitlements. Pursuant to the circular, the rights entitlement are also traded on the secondary market platform of the stock exchange.

 

Thus, SEBI has added the requirement to give details of rights entitlement.
Form C and D Sub-field w.r.t.  “Transaction type” under the Field “Securities acquired/ disposed” The format sought the nature of transaction which included:

a.       Buy

b.       Sale

c.       Pledge

d.       Revocation

e.       Invocation

 The options for nature of transaction will now include:

a.       Purchase

b.       Sale

c.       Pledge

d.       Revocation

e.       Invocation

f.        Others (to be specified)

 The transaction can be other than purchase, sale or pledge of securities, e.g. gift of securities. Accordingly, the person will have to specify the nature of transaction in the disclosure.
Form C and D Newly inserted: Field w.r.t. “Exchange on which the trade was executed” under sub-heading- 1 No field for details of stock exchange In the revised format, a new field has been inserted to mention the stock exchange on which the securities were traded. In the earlier format, there was a field to mention the stock exchange on which derivatives were traded, but not for the trade in securities. The new insertion is made to align the format for trading in securities with that of trading in derivatives.

 

Conclusion and actionables

The revised formats issued by SEBI will reflect the information of trade in more appropriate manner and is surely a welcome move.

The listed companies will be required to amend the Forms annexed to their Code of Conduct for Prevention of Insider Trading in order to align them with the revised formats.

Further, SEBI vide circular dated 9th September, 2021[7], automated the continual disclosures under regulation 7(2) of the Regulations by providing the manner of system driven disclosures. Pursuant to the circular, the listed companies will be required to comply with existing system for giving disclosure till March 31, 2021. Accordingly, the listed entities will have to amend the Form C annexed to their Code of Conduct and continue to give disclosure in the said form till 31st March, 2021.

 

Our other material can be accessed through the below links:

  1. Guide to PIT Documentation

https://vinodkothari.com/2019/02/guide-to-pit-documentation/

  1. Highlights of 2nd Amendment to PIT Regulations

 https://vinodkothari.com/2019/07/highlights-of-2nd-amendment-to-pit-regulations/

  1. Amendments in SEBI(PIT) Regulations, 2015 : From April, 2019 to July, 2020

https://vinodkothari.com/2020/07/recent-amendments-in-pit-regulations/

 

[1] https://www.sebi.gov.in/legal/circulars/may-2015/disclosures-under-sebi-prohibition-of-insider-trading-regulations-2015_29783.html

[2] https://www.sebi.gov.in/legal/circulars/sep-2015/revised-disclosure-formats-under-sebi-prohibition-of-insider-trading-regulations-2015_30680.html

[3] https://www.sebi.gov.in/legal/circulars/feb-2021/revised-disclosure-formats-under-regulation-7-of-sebi-prohibition-of-insider-trading-regulations-2015_49068.html

[4] Details of change in holding of securities of promoter, member of the promoter group, designated person or director and immediate relatives of such persons and other such persons as mentioned in Regulation 6(2) under Form C

[5] Details of trading in securities by other connected persons as identified by the company under Form D

[6] https://www.sebi.gov.in/legal/circulars/jan-2020/streamlining-the-process-of-rights-issue_45753.html

[7] https://www.sebi.gov.in/legal/circulars/sep-2020/automation-of-continual-disclosures-under-regulation-7-2-of-sebi-prohibition-of-insider-trading-regulations-2015-system-driven-disclosures_47523.html

 

Corporate law reforms: Union Budget 2021-22

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-Pammy Jaiswal and Abhishek Saraf (corplaw@vinodkothari.com)

Driving with the mantra of ease of doing business!

Introduction

While the Union Budget for the FY 2021-2022 was focused on infrastructure development, the Hon. Finance Minister in her Budget Speech also mentioned about several significant changes in the area of corporate laws. Changes have been proposed to decriminalize the LLP Act, 2008, increase in the threshold of the definition for small companies, introduction of an updated version of the MCA, changes in the OPC framework, increase in the FDI limits in an insurance company, etc.

We have covered each one of these below for the sake of understanding the relevance of these proposals.

Decriminalization of offences under Limited Liability Act, 2008 (LLP Act)

Considering the fact that the Government has completed taking its steps for decriminalization of offences by amending the Companies Act, 2013, Finance Minister in her speech mentioned that it is now the time for decriminalization of the offences under the LLP Act. Having said that it is important to note that the Government has already started taking tangible steps for giving effect to this proposal. The Company Law Committee (CLC) has presented/issued its Report of the Company Law Committee on Decriminalization of the Limited Liability Partnership Act, 2008 to the Ministry of Corporate Affairs on 4th January, 2021 for decriminalization of certain compoundable offences and shifting them to the In-house Adjudication Mechanism. The said CLC Report is open for public recommendations till 2nd February, 2021.

The said Report proposes to decriminalize 12 offences and 1 penal provision has been proposed to be omitted. The motive behind the same is to de-clog the courts or the NCLTs thereby reducing their burden from non-serious matters. Further, the Report not only contains changes in the LLP Act for decriminalization of offences but also travels much beyond. Some of the other major changes in this regard consists of introduction of explicit provisions for issuance of secured NCDs by LLPs, restricting the merger of LLPs with companies, introduction of accounting standards for certain classes of LLPs, etc. Besides this, the Report also introduces changes in the definition of business of LLPS, alignment of the reference with that of the Companies Act, 2013 (CA, 2013) and much more.

Our detailed article on the same can be accessed from here

Revision in the definition of Small Company

Section 2(85) of the CA, 2013 defines the term ‘small company’ as any company other than public company having paid up share capital not exceeding fifty lakh rupees and turnover not exceeding two crore rupees. It has been proposed in the Budget, to revise the definition of Small Companies by increasing the thresholds for paid up share capital from “not exceeding fifty lakhs rupees” to “not exceeding two crore rupees” and turnover from “not exceeding two crore” to “not exceeding twenty crore rupees”.

Some of the relaxations to the small companies under the CA, 2013 include:
Cash Flow Statement not required to be given under the financial statements;
One board meeting in each half of calendar year is sufficient as compared to four board meetings in a financial year with a gap of not more than 120 days between two board meetings;
Abridged director’s report;
Statutory auditors are not required to report about adequacy of internal controls and their operational effectiveness.
Small Companies or any of their officer in default are subject to lesser penalties under section 446B of the CA, 2013 for non-compliance of any provisions of the CA, 2013.

The increase in thresholds will bring more than 2 lakh additional companies under the definition of ‘small company’ which can have a lower compliance burden including lower penalties for violations and lower filing requirements. Therefore, this proposal can surely be seen as an important drive for ease of doing business.

Changes in One Person Companies (OPC) regulatory framework

Currently, the CA, 2013 provides that an OPC cannot convert itself into any other kind of a company unless a period of 2 years have elapsed since the date of its incorporation. The only relaxation is that if during the said period of 2 years the threshold limits of paid-up share capital exceeds Rs. 50 lacs and the average annual turnover during the relevant period exceeds Rs. 2 crore then the conversion can take place before the expiry of 2 years.
Government has proposed to remove the monetary limit and convert itself into any other kind for the purpose of motivating the growth of OPCs which is mostly done by start-ups.
Further, for the purpose of relaxing the eligibility of persons for forming OPCs, the Government also proposes to ease the residential requirements for the person setting up an OPC from 182 days to 120 days in India. Furthermore, it has also been proposes to allow Non-Resident Indians to operate OPCs in India.

MCA21 Version 3.0

The Ministry has proposed to revamp the MCA portal by launching MCA21 Version 3.0 in the financial year 2021-22. The new version will be using data analytics, artificial intelligence and machine learning drive and will have additional modules for e-scrutiny, e-Adjudication, e-Consultation and Compliance Management.

Strengthening of NCLT framework

It has been proposed to strengthen the NCLT framework to ensure faster resolution of cases. In light of the new normal and increased emphasis on Digital India, e-Courts has been proposed to be implemented.

Further, with a similar intent and to further provide an alternate mode of debt resolution, a separate framework is also proposed for the cases involving the MSMEs.

Increased FDI in insurance companies

The main proposal for insurance companies in the Budget is to increase the permissible FDI limits such companies from the current 49% to 74%. Further, the said increased limit has been proposed with several safeguards with respect to ownership and control which includes:

majority of Directors on the Board and Key Managerial Persons (KMP) to be resident of India;
independent directors- atleast 50% of the directors to be independent directors; and
specified percentage of profits being retained as general reserve.

Further, it is also imperative to mention about the IRDA (Indian Owned and Controlled) Guidelines) which currently provides a limit of 49% of foreign shareholding in an Indian insurance company. Considering the aforesaid proposal, the said limit will be changed to reflect the increased limit. Further the said Guidelines also talks about various control safeguards by Indian promoters and provides the following modes of exercising control in an Indian insurance company:
Virtue of shareholding; (or)
Management rights; (or)
Shareholders agreements; (or)
Voting agreements; (or)
Any other manner as per the applicable laws.

Our article on FDI norms for insurance sector can be accessed from here
Our article on IRDA Guidelines on Indian owned and controlled can be viewed here

Securities Market Code

The Budget has proposed to consolidate the provisions of following laws relating to securities market into a rationalized single Code to be termed as “Securities Market Code”
SEBI Act 1992,
Depositories Act 1996,
Securities Contracts (Regulation) Act 1956, and
Government Securities Act 2007

Stamp duty proposed to be exempted on certain Govt. sale transactions

The Finance Bill has proposed to insert a new section 8G to the Indian Stamp Act, 1899 with respect to stamp duty exemption in case of strategic sale, disinvestment, etc., of an immovable property as discussed hereunder:
Transaction involving: Strategic sale or disinvestment or demerger or any other scheme of arrangement
Purpose of Transaction: Execution of any instrument for conveyance or transfer of a business or asset or right in any immovable property;
Transferor entities: Government Company, its subsidiaries, unit or joint venture
Transferee entities: Another Government Company or the Central Government or any State Government
Nature of benefit: Transaction shall be exemption from stamp duty if carried out with the approval of the Central Government.
Nature of Government companies covered: Those covered under Section 2(45) of the Companies Act, 2013.
Gap in the proposed amendment: The definition of a ‘Government Company’ under Companies Act, 2013 does not cover companies or body corporates established under a special statute such as SBI, LIC, UTI etc. These body corporates, like government companies, are public sector enterprises owned and controlled by the Government.

While the intention of the Government is to exempt stamp duty in case of exchange of assets between public sector enterprises, there still remains an anomaly whether the said exemption will be applicable in case of conveyance of property, by or to public sector enterprises that do not fall under the definition of Government Company.

Conclusion

Besides various proposals of the Union Budget for the FY 2021-2022, the corporate law proposals, as can be observed from aforesaid discussions, have been introduced to allow ease of doing business. While the changes have been proposed, the final set of changes once in place will allow witnessing the ease of doing mantra as intended by the Government.

FAQs on CSR 2021 Amendments

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FAQs on CSR 2021 Amendments

[These FAQs pertain to the amendments made vide the Companies (Amendment) Act, 2020 and the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021. These FAQs need to be read with our FAQs on CSR]

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