MCA Amends Companies (Share Capital and Debentures) Rules, 2014 and Section 381 of the Companies Act, 2013
October 31, 2016
In the last two years, the Indian government has introduced several measures to facilitate ease of doing business in the country. Each initiative has been introduced with an intention to bring ease of doing business in India at par with the global norms.
To further this cause, the Ministry of Corporate Affairs of India (hereinafter referred to as the “MCA”) has taken two significant steps:
Firstly, it has amended the Companies (Share Capital and Debentures) Rules, 2014 (hereinafter referred to as “the Rules”) by notifying the Companies (Share Capital and Debentures) Third Amendment Rules, 2016 (hereinafter referred to as “the Amendment Rules”). The Amendment Rules have brought about the following changes:
The conditions for Equity Shares with differential rights;
Relaxations to Startups for Issue of Sweat Equity Shares and Employee Stock Options;
Requirements for Issue of Shares on Preferential Basis;
Conditions for notice to Registrar for Alternation of Share Capital;
Conditions for Issue of Secured Debentures; and
Conditions for Creating Debenture Redemption Reserve for Redemption of Debentures.
Secondly, it has modified the requirement of Section 381(1)(a) of the Companies Act, 2013 with regard to its applicability to Foreign Airlines Company.
Through this article, we provide an overview of these amendments/clarifications issued by the MCA in order to remove practical hindrances faced by Companies, while executing these provisions and analyze them.
I. AN OVERVIEW OF THE AMENDMENT RULES
1. The conditions for Equity Share with differential rights
In terms of the Rules, a Company limited by shares can issue equity shares with differential rights as to dividend, voting or otherwise, only if it complies with certain conditions as stated in Rule 4(1). Rule 4(1)(g) prohibits such a company from issuing such shares if it has defaulted in the following:
Payment of dividend on preference shares, or
Repayment of any term loan from a Public or State Level financial institution or Scheduled Bank that has become repayable, or
Interest payable thereon or dues with respect to statutory payments relating to its employees to any authority, or
Default in crediting the amount in Investor Education and Protection Fund to the Central Government.
The Amendment Rules add a proviso to Rule 4(1) (g) of the Rules according to which such a Company may issue equity shares with differential rights upon expiry of five (05) years from the end of the financial year in which the aforementioned default was made good.
2. Relaxations to Startups for Issue of Sweat Equity Shares and Employee Stock Options
Relaxation for Issue of Sweat Equity Shares
Rule 8 (4) of the Rules states that a Company shall not issue Sweat Equity Shares for more than fifteen (15) percent of the existing paid up share in a year or shares of the issue value of Rs. Five (05) crores, whichever is higher. This is conditional on the fact that a Company shall not issue Sweat Equity shares of more than Twenty Five (25) percent, of the paid up Equity Capital of the Company at any time.
The Amendment Rules add a further proviso to Rule 8(4) of the Rules, which states that a Startup Company, may issue upto Fifty (50) percent of its paid up capital as Sweat Equity Shares upto Five (05) years from the date of its incorporation or registration.
Relaxation for Employee Stock Options
In addition to the above, Rule 12 of the Rules prohibits an Unlisted Company from offering shares to its Employees under a Scheme of Employees’ Stock Option, unless it complies with certain mandatory requirements.
The Amendment Rules provide relaxation to a Startup Company from the above conditions up to Five (05) years from the date of its incorporation or registration.
3. Requirements for Issue of Shares on Preferential Basis
Rule 13 of the Rules requires the Unlisted Companies making the preferential offer of shares or other securities to make the preferential offer in accordance with the relevant provisions of the Companies Act and subject to compliance with certain requirements.
The Amendment Rules omit the requirement for securities allotted by way of preferential offer to be fully paid up at the time of their allotment. Further, convertible securities offered on a preferential basis with an option to apply for and get equity shares allotted shall have their prices determined pursuant to conversion:
Either upfront at the time when the offer of convertible securities is made, on the basis of valuation report of the registered valuer given at the stage of offer, or
Not before thirty (30) days to the date when the holder of convertible security becomes entitled to apply for shares, based upon the valuation report of the registered valuer, given not earlier than sixty (60) days of the date when the holder of convertible security becomes entitled to apply for shares.
The Company is now required to take a decision with regard to determination of their prices at the time of offer of Convertible security itself and also disclose the relevant date with reference to which the price has been arrived at.
4. Notice to Registrar for Alternation of Share Capital
The Rules require, a Company to file a notice with the Registrar of Companies, where:
It alters its share capital in any manner specified in sub-section (1) of section 61 of the Companies Act, 2013, or
An order is passed by the Government increasing the authorized capital of the Company in pursuance of sub-section (4) read with sub-section (6) of section 62 of the Companies Act, 2013, or
It redeems any redeemable preference shares.
In addition to above, the Amendment Rules now require a Company that does not have a share capital and increases its number of members as well to file a notice with the Registrar.
5.Conditions for Issuing Secured Debentures
Rule 18 of the Rules requires Companies to comply with certain conditions for issuing secured debentures.
Rule 18 (1) (b) of the Rules requires securing issue of secured debentures by the creation of a charge on the properties or assets of the Company, having a value which is sufficient for the due repayment of the amount of debentures and interest thereon.
Further, Rule 18 (1) (d) of the Rules requires the creation of security for the debentures by way of a charge or mortgage in favour of the debenture trustee on-
Any specific movable property of the Company (not being in the nature of pledge); or
Any specific immovable property wherever situated, or any interest therein.
The Amendment Rules amend Rule 18 (1) (b) of the Rules to the extent that such an issue of debentures can now be secured by the creation of a charge on the properties or assets of the company or its subsidiaries, or its holding company, or its associates companies, having a value which is sufficient for the due repayment of the amount of debentures and interest thereon.
Additionally, the Amendment Rules amends Rule 18 (1) (d) (i) of the Rules to the extent that the security for the debentures by way of a charge or mortgage can now be created in favour of the debenture trustee on any specific movable property of the Company or its holding company or subsidiaries or associate companies or otherwise.
6. Conditions for Creating Debenture Redemption Reserve for Redemption of Debentures
Rule 18 (7) of the Rules requires Companies to create a Debenture Redemption Reserve (DRR) in accordance with the conditions as prescribed in the rules.
Rule 18 (7)(b)(ii) of the Rules states that for Non-Banking Financial Companies registered with the RBI, a DRR worth 25% of the value of debentures issued through public issue is required to be created.
The Amendment Rules amends Rule 18 (7)(b)(ii) of the Rules to the extent that it requires a DRR worth 25% of the value of outstanding debentures issued through public issue to be created.
Further, it adds a proviso to Rule 18 (7) (b) of the Rules, which states that in cases where a Company intends to redeemits debentures prematurely, it may provide for transfer of such amount in DRR as is necessary for redemption of such debentures even if it exceeds the specified limits.
II. MODIFICATION OF SECTION 381 OF THE COMPANIES ACT, 2013
The MCA, through its notification number S.O. 2463(E), dated July 19, 2016, has clarified the requirement of Section 381(1)(a) of the Companies Act, 2013 with regard to its applicability to Foreign Airlines Company.