INTRODUCTION
Pursuant to a notification issued on March 26, 2014, Ministry of Corporate Affairs has recently notified more sections of the Companies Act, 2013 (“New Act”) and also some rules which will come into force effective April 1, 2014.
KEY SECTION-WISE ANALYSIS & RELATED KEY ASPECTS UNDER THE NEW ACT
We have provided below analysis / key aspects of some of the important sections of the New Act and the related rules which have been notified.
Definition of foreign company [Ref: Section 2 (42), Companies (Specification of definitions details) Rules, 2014]
Under the Act, the term foreign company includes company or body corporate incorporated outside India which “has” a “place of business in India” whether by itself or through an agent in India “through electronic mode”. The term “electronic mode” is defined under Companies (Specification of definitions details) Rules, 2014 and means carrying out electronically based, whether main server is installed in India or not, including, but not limited to (i) business to business and business to consumer transactions, data interchange and other digital supply transactions; (ii) offering to accept deposits or inviting deposits or accepting deposits or subscriptions in securities, in India or from citizens of India; (iii). financial settlements, web based marketing, advisory and transactional services, database services and products, supply chain management; (iv). online services such as telemarketing, telecommuting, telemedicine, education and information research; and (v). all related data communication services, whether conducted by e-mail, mobile devices, social media, cloud computing, document management, voice or data transmission or otherwise;
Implication
In view of the aforesaid wide and inclusive definition of “electronic mode” an offshore company which does not have a physical presence in India, but adopts one of the several possible business models for offering its products or services in India through the medium of e-commerce (like virtual store front, e-helpdesk etc situated on a computer server in India or elsewhere) would be considered to be a “foreign company” under the new Act.
Further, it is pertinent to note that the section 2(42) which defines a foreign company uses the phraseology “has a business” as opposed to “carries on business”. However, the definition of the term “electronic mode” as mentioned above in the rules, uses the phraseology “carrying out”. A question may arise as to whether the continuity / frequency of transactions carried out through the place of business would be of relevance to establish a “place of business” in India.
Independent director [Ref: Sections 2 (47), 149, Schedule IV, Companies (Appointment and Qualification of Directors) Rules, 2014.]
1/3rd of the Board of a listed public company compulsorily to comprise of independent directors.
As per Companies (Appointment and Qualification of Directors) Rules, 2014, the following class or classes of public companies are required to have at least two directors as independent directors: (i) public companies having paid up share capital of Rs. 10,00,00,000 (Rupees ten crores) or more; or (ii) public companies having turnover of Rs. 100,00,00,000 (Rupees one hundred crores) or more; or (iii) public companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding Rs. 50,00,00,000 (Rupees Fifty Crores only)
In case a company is required to appoint a higher number of independent directors due to composition of its audit committee, such higher number of independent directors will be applicable to it.
The term “independent director” is defined on the lines of clause 49 of the listing agreement. Recently, SEBI has also approved the proposals to amend the Listing Agreement which inter-alia includes certain changes in the definition of independent director under the listing agreement, in order to align the provisions of Listing Agreement with the provisions of the newly enacted Companies Act, 2013 and the said amendments have been made applicable to all listed companies with effect from October 01, 2014. However, presently, there are conflicting provisions between the New Act and the listing agreement with respect to the definition of independent director which is as under:
Number
Under the New Act, every listed public company required to have at least 1/3rd of the total number of directors as independent directors. Under the listing agreement, the number of independent directors in a company may differ depending on the Chairman on the Board. Any intermittent vacancy of an independent director will be required to be filled-up by the Board at the earliest but not later than immediate next Board meeting or 3 months from the date of such vacancy, whichever is later.
Pecuniary relationship
The New Act provides that the independent director and / or his relatives should not have any pecuniary relationship with the Company, its holding subsidiary or associate company. This relationship is limited to 2% or more of the Company’s gross turnover or total income or Rs. 50 lakhs or such higher amount as may be prescribed. However, under the listing agreement, ‘pecuniary relationship’ is not limited in scope like the provisions mentioned above.
Stock Options as remuneration
Under the New Act, an independent director is not entitled to any stock option. Listing agreement presently allows shareholders to fix the maximum number of stock options to be given as remuneration to an independent director. However, with effect from October 1, 2014, stock options to an independent director is prohibited.
Term of independent director
a) Tenure not exceeding -5- (five) consecutive years. b) Not liable to retire by rotation. c) Eligible for reappointment by special resolution. d) Cannot hold office for more than -2- consecutive terms. e) Eligible for appointment after a gap of 3 years of ceasing to become an independent director. f) During the above cooling period, cannot be appointed in or be associated with the company in any other capacity, either directly or indirectly.
Code of Conduct [Ref: Schedule IV]
Required to abide by the code of conduct provisions specified in Schedule IV of the Act. The Code inter alia lists the guidelines for role and functions, duties, manner of appointment, reappointment and removal, mechanism for evaluating the performance of an independent director (“ID”). Salient features of Code of Conduct a) IDs required to bring independent judgment b) Scrutinize management performance c) Safeguard interests of all stakeholders. d) Moderate and arbitrate in the interest of the company as a whole, in situations of conflict between management and shareholder’s interest. e) Strive to attend all meetings of Board and the committees of which he is a member. f) Not to unfairly obstruct the functioning of Board. g) Report concerns about unethical behaviour, actual or suspected fraud or violation of company’s code of conduct. h) Appointment of IDs to be approved at the meeting of the shareholders. Appointment of IDs to be finalized through a letter of appointment setting out inter alia fiduciary duties, expectation of Board from the appointed director, remuneration. j) Terms and conditions of appointment to also be posted on company’s website. k) Reappointment to be made on the basis of report of performance evaluation. l) IDs to hold at least 1 meeting in a year without the attendance of non independent directors and members of management. The meeting shall review the performance of independent directors and Board as a whole.
One Person Company (“OPC”) [Ref: Section 2(62), 3, Companies (Incorporation) Rules, 2014 ]
A company which has only 1 person as a member. Minimum 1 director and maximum 15.
Will encourage entrepreneurship.
Key aspects of a OPC under the New Act: a) Will be treated as a private company. b) No personal liability. c) Perpetual succession through succession clause in case of death / incapacity – nomination to be with other person’s consent.
As per Companies (Incorporation) Rules, 2014, only a natural person who is an Indian citizen and resident in India (a) shall be eligible to incorporate a One Person Company; and (b) shall be a nominee for the sole member of an OPC. For the aforesaid purpose, the term “resident in India” means a person who has stayed in India for a period of not less than 182 days during the immediately preceding one calendar year.
No person shall be eligible to incorporate more than a OPC or become nominee in more than one such company.
A minor cannot become a member or nominee of the OPC or can hold share with beneficial interest.
An OPC cannot convert voluntarily into any kind of company unless 2 (two) years is expired from the date of its incorporation, except where threshold limit (paid up share capital) is increased beyond Rs. 50,00,000 (Rupees Fifty lakhs) or its average annual turnover during the relevant period exceeds Rs. 2,00,00,000 (Rupees Two Crores), the OPC ceases to be a OPC and it will be required to convert itself, within 6 months of the date on which its paid up share capital is increased beyond Rs. 50,00,000 or the last day of the relevant period during which its average annual turnover exceeds Rs. 2,00,00,000 as the case may be, into either a private company with minimum of two members and two directors or a public company with at least of seven members and three directors in accordance with the provisions of section 18 of the Act.
Small Company [Ref: Section 2(85)]
A company, other than a public company with a) Paid up capital – Not more than Rs. 50 lakhs or higher amount as may be prescribed but not exceeding Rs. 5 crores or (b) Turnover not more than Rs. 2 crores or such higher amount as may be prescribed but not exceeding more than Rs. 20 crores as per its last profit and loss account. c) It cannot be a (i) holding or subsidiary company, or (ii) a charitable company or (iii) a company governed by any special Act.
Entrenchment provisions under Articles of Association [Ref: Section 4, Companies (Incorporation) Rules, 2014]
The New Act provided flexibility to companies by providing that specified provisions of the articles may be altered only if conditions or procedures as that are more restrictive than special resolution are complied with. The entrenchment provisions shall only be made either at time of incorporation or by amendment in articles if agreed upon by all the members of a private company and by special resolution in case of public company.
As per Companies (Incorporation) Rules, 2014, where the articles contain the provisions for entrenchment, the company has to give notice to the RoC of such provisions in the prescribed forms at the time of incorporation of the company or in case of existing companies, the same has to be filed in the prescribed form within 30 days from the date of entrenchment of the articles, as the case may be, along with the prescribed fee as provided in the Companies (Registration offices and fees) Rules, 2014.
Implication: By expressly providing entrenchment provisions under articles, now a statutory recognition is given to veto / affirmative voting / super majority rights given to particular individuals (mainly nominee directors of PE / VC / other financial / strategic investor) under conventional investment agreements.
Consequences for incorporation of company by furnishing false / incorrect information [Ref: Section 7]
If any person furnishes any false or incorrect particulars of any information or suppresses any material information, of which he is aware in any of the documents filed with the Registrar in relation to the registration of a company, he shall be liable for action under section 447 of the New Act (i.e. offence of fraud – minimum 6 months imprisonment and 3 years if public interest involved).
Additionally, at any time after the incorporation of a company, it is proved that the company has been got incorporated by furnishing any false or incorrect information or representation or by suppressing any material fact or information in any of the documents or declaration filed or made for incorporating such company, or by any fraudulent action, the promoters, the persons named as the first directors of the company and the persons making declaration shall each be liable for action under section 447 as mentioned above.
Implications
Professionals have to be very vigilant while certifying the forms relating to incorporation of company because negligence may expose them to action for fraud (subject to an opportunity of being heard and establishment of mens rea) which has serious consequences.
Commencement of business [Ref: Section 11, Companies (Incorporation) Rules, 2014]
Unlike Companies Act, 1956 which required only public companies to obtain certificate of commencement of business prior to commencing business or exercising its borrowing powers, now even private companies are required to file declaration with the RoC in the form prescribed under Companies (Incorporation) Rules, 2014 before commencement of business / exercising borrowing powers and the contents of the form shall be verified by a Company Secretary in practice or a Chartered Accountant or a Cost Accountant in practice. However, the concept of certificate of commencement of business to be issued by the RoC upon filing of declaration is removed.
Registered office of the Company [Ref: Section 12, Companies (Incorporation) Rules, 2014]
Company can have its registered office within 15 days of incorporation and furnish to the RoC, verification of the same within 30 days of its incorporation in the form prescribed under Companies (Incorporation) Rules, 2014 along with any of the supporting documents as mentioned under the said Rules.
Change of object by a company which raises money from public [Ref: Section 13]
A company, which has raised money from public through prospectus and still has any unutilised amount out of the money so raised cannot change its objects for which it raised the money through prospectus unless a special resolution is passed by the company through postal ballot and inter alia— (i) the details, as may be prescribed, in respect of such resolution shall also be published in the newspapers (one in English and one in vernacular language) which is in circulation at the place where the registered office of the company is situated and shall also be placed on the website of the company, if any, indicating therein the justification for such change; (ii) the dissenting shareholders are given an opportunity to exit by the promoters and shareholders having control in accordance with regulations to be specified by the SEBI.
Private placement [Ref: Sections 23 & 42, Companies (Prospectus and Allotment of Securities) Rules, 2014]
Salient features under the New Act and Companies (Prospectus and Allotment of Securities) Rules, 2014
a) Offer or invitation to subscribe securities made to a select group of persons through issue of a private placement offer letter in the form prescribed under Companies (Prospectus and Allotment of Securities) Rules, 2014. No person other than the person so addressed in the application form will be allowed to apply through such application form. b) Offer to more than 200 (Two hundred) persons in a financial year, to be considered as public offer, regardless of whether the Company intends to lists its securities on the stock exchange or not. Exceptions – Issue to QIB’s and securities issued under ESOP. c) The aforesaid limit of 200 persons would be reckoned individually for each kind of security that is equity share, preference share or debenture. d) The value of such offer or invitation per person shall be with an investment size of not less than Rs. 20,000 (Rupees twenty thousand) of face value of the securities. e) Prior approval of shareholders by special resolution before making such offer f) Recording subscribers’ names prior to invitation to subscribe and complete information about such offer to be filed with the RoC within a period of 30 days of circulation of relevant private placement offer letter. e) Allotment to be made within 60 days. f) No subscription by cash. Only through cheque or demand draft or other banking channels. g) the payment to be made for subscription to securities will be required to be made from the bank account of the person subscribing to such securities and the company shall keep the record of the bank account from where such payments for subscriptions have been received. h) Separate bank account to be used for allotment or refund application money. i) The company has to maintain a complete record of private placement offers in the prescribed form and a copy of such record along with the private placement offer letter in in the prescribed form have to be filed with the RoC and where the company is listed, with the SEBI within a period of 30 days of circulation of the private placement offer letter. j) In case of contravention of any of the provisions, the company, its promoters and directors, penalty of minimum Rs. 2 crores or amount involved in the offer, whichever is higher & refunding all monies within 30 days of the order imposing the penalty.
Implications
Private placement is now subjected to strict compliances and heavy penal consequences to curb mischief of public offers in garb of private placement. As offer to more than 200 persons in a financial year is considered to be a public offer, companies cannot take the route of offering securities to more than 200 persons in tranches, which they could earlier avail under Companies Act, 1956. It is also essential that the company making a private placement strictly complies with all and not just some of the compliance requirements of section 42, otherwise not only penal consequences will be attracted, but once the offer is treated as a public issue, SEBI also gets jurisdiction to penalize the company for having failed to comply with the provisions of SEBI ICDR Regulations, SCRA, listing agreement etc, which in turn have separate penal consequences under the SEBI Act.
Variation in terms of contract or objects in prospectus [Ref: Sections 27]
The dissenting shareholders being those shareholders who have not agreed to the proposal to vary the terms of contracts or objects referred to in the prospectus, shall be given an exit offer by promoters or controlling shareholders at such exit price, and in such manner and conditions as may be specified by the Securities and Exchange Board by making regulations in this behalf.
Offer for Sale [Ref: Section 28]
Where certain members of a company propose, in consultation with the Board of Directors to offer, in accordance with the provisions of any law for the time being in force, whole or part of their holding of shares to the public, they may do so in accordance with such procedure as may be prescribed. Any document by which the offer of sale to the public is made shall, for all purposes, be deemed to be a prospectus issued by the company. The members, whether individuals or bodies corporate or both, whose shares are proposed to be offered to the public, shall collectively authorise the company, whose shares are offered for sale to the public, to take all actions in respect of offer of sale for and on their behalf and they shall reimburse the company all expenses incurred by it on this matter.
Issue of Global Depository Receipts [Ref: Section 41, Companies (Issue of Global Depository Receipts) Rules, 2014]
Enabling provisions under the New Act to issue GDRs subject to approval of members by a special resolution. As per the Companies (Issue of Global Depository Receipts) Rules, 2014, the company is required to appoint a merchant banker or a practising chartered accountant or a practising cost accountant or a practising company secretary to oversee all the compliances relating to issue of GDRs and the compliance report taken from such professional has to be placed at the Board / Board committee meeting to be held immediately after closure of all formalities of the issue of GDRs.
Kinds of share capital [Ref: Section 43]
Under Companies Act, 1956, a public company could have only 2 kinds of share capital [i.e. (i) equity (with or without differential rights as to dividend, voting or otherwise) and (ii) preference share capital). However, there was no such stipulation with respect to private companies. Hence, a question used to arise as to whether a private company could issue equity shares with absolutely no voting rights. While on one hand it was argued that the same was possible as there was no express prohibition in so far as private companies was concerned, on the other hand, it was argued that although there was no such prohibition for private companies, shares with absolutely no voting rights could not be issued as voting was an inherent characteristic of a share. Under the New Act, there is no such distinction between a public and a private company with respect to share capital.
About Bulwark Solicitors
Bulwark Solicitors is a law firm pioneered by Solicitor Chirag Sancheti and Advocate Deep Shridharani. The firm has expertise in the areas of both Litigation and non-Litigation. Under the non-litigation Law practice, the firm practices in the areas of Corporate Law, Intellectual Property Law, Bankruptcy & Insolvency Law, Competition Law, Real Estate and Conveyancing and DTAA Advisory. Further, under Corporate Law area, we practice Company Law, Securities Law, Mergers and Amalgamations, Private Equity and Venture Capital Investment Transactions, Legal Due Diligence and Foreign Exchange Management Law.