MCA Amends Companies (Share Capital and Debentures) Rules, 2014 and Section 381 of the Companies Ac


INTRODUCTION

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[1] (hereinafter referred to as “the Rules”) by notifying the Companies (Share Capital and Debentures) Third Amendment Rules, 2016[2] (hereinafter referred to as “the Amendment Rules”). The Amendment Rules have brought about the following changes:

  1. The conditions for Equity Shares with differential rights;[3]

  2. Relaxations to Startups for Issue of Sweat Equity Shares[4] and Employee Stock Options;[5]

  3. Requirements for Issue of Shares on Preferential Basis;[6]

  4. Conditions for notice to Registrar for Alternation of Share Capital;[7]

  5. Conditions for Issue of Secured Debentures;[8] and

  6. Conditions for Creating Debenture Redemption Reserve for Redemption of Debentures.[9]


Secondly, it has modified the requirement of Section 381(1)(a) of the Companies Act, 2013[10] with regard to its applicability to Foreign Airlines Company.[11]


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[12]


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).[13] 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.


Amendment


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[14]


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.


Amendment


The Amendment Rules add a further proviso to Rule 8(4) of the Rules, which states that a Startup Company[15], 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.[16]


Amendment


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[17]


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.[18]


Amendment


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.[19] 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[20]


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,[21] 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,[22] or

  • It redeems any redeemable preference shares.


Amendment


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[23]


Rule 18 of the Rules requires Companies to comply with certain conditions for issuing secured debentures.[24]


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-

  1. Any specific movable property of the Company (not being in the nature of pledge); or

  2. Any specific immovable property wherever situated, or any interest therein.


Amendment


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[25]


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.


Amendment

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 redeem its 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.[26]


Section 381 requires a Foreign Company, in every calendar year, to:

  1. Make out a balance sheet and profit and loss account in such form, containing such particulars and including or having annexed or attached thereto such documents as may be prescribed; and

  2. Deliver a copy of those documents to the Registrar.


MCA’s Modification


With regard to Airline Companies, submission of the following documents with the Registrar of Companies in respect of the period ending on or after the 31st March 2016, shall be considered sufficient:


(i) Documents relating to copies of latest consolidated financial statements of the parent foreign company, as submitted by it to the prescribed authority in the country of its incorporation under the provisions of the law for the time being in force in that country. A certified translation in English is required to be annexed in case the documents are not in English.


(ii) In respect of its Indian Business operations, a statement of receipts and payments for the financial year, duly authenticated by a practicing Chartered Accountant in India or a firm or a Limited Liability Partnership of practicing Chartered Accountants in India.


(iii) The documents required to be filed with Registrar of Companies under the Companies (Registration of Foreign Companies) Rules, 2014 including but not limited to statement of related party transactions, statement of repatriation of profits, etc.


ANALYSIS


The Amendment Rules


These amendments to the Rules are aimed at providing greater flexibility to organizations for raising both debt and equity capital. Through these amendment Rules, the Government of India has further encouraged entrepreneurship and innovation by easing regulatory mechanisms and creating a supporting environment, thereby encouraging innovation and creation of more startups.


Upfront determination of conversion price is another significant development, through which the MCA seeks to align the Rules with the FDI policy. An upfront determination of the conversion price of the convertible capital instruments shall facilitate further transparency in the share capital accumulation procedures adopted by any Company. However, it is still to be seen what measures does the MCA adopt in terms of which the price of such conversion capital instruments becomes equivalent to the fair value as worked out.


Furthermore, Companies issuing secured debentures can now create charge on either their own properties or assets, or properties or assets of their holding companies, or subsidiary companies, or associate companies, as the case may be. This shall further relax and resolve the requirement of creating a security for a Company and is a relief for Companies whose own assets and properties are not available.


The Amendment Rules seek to further aid ease of doing business in India and are more or less successful in that endeavor. They also portray the MCA’s constant attempts to a tranquil transition of the Companies from the Companies Act, 1956 to Companies Act, 2013.


MCA’s Modification of Section 381 of the Companies Act, 2013


The Modifications relax the cumbersome requirement for Foreign Airline Companies to submit financial statements and allow them to submit integrated financial statements. It clearly codifies the documents that are required to be filed by the Foreign Airline Companies thereby avoiding any and all form of ambiguity.


Disclaimer: The views and opinions expressed in this article are based on extensive and thorough research. In no way does the author or the law firm claim ownership of the ideas and concepts presented in this paper. Information so provided is to be strictly considered for general reference of the subject matter, which has been adequately referenced. Specialist advice should be sought about any specific circumstances directly from the law firm.



REFERENCES

[1] MCA, ‘Companies (Share Capital and Debentures) Rules, 2014, (Ministry of Corporate Affairs, The Gazette of India: Extraordinary, 31st March, 2014) available at: <http://mca.gov.in/Ministry/pdf/NCARules_Chapter4.pdf > accessed on 30 November, 2016

[2] MCA, ‘Companies (Share Capital and Debentures) Third Amendment Rules, 2016, (Ministry of Corporate Affairs, The Gazette of India: Extraordinary, 19 July, 2016) available at: <http://mca.gov.in/Ministry/pdf/Rules_19072016.pdf > accessed on 30 November, 2016

[3] Proviso to Rule 4 (1) (g), Id 2, at 3

[4] Proviso to Rule 8 (4), Id 2, at 3

[5] Proviso to Rule 12 (1) (c) Id 2, at 4

[6] Rule 13 (2), Id 2, at 4

[7] Rule 15, Id 2, at 4

[8] Rule 18(1), Id 2, at 4

[9] Rule 18 (7), Id 2, at 4

[10] Section 381: Accounts of Foreign Company

(1) Every Foreign Company shall, in every calendar year,

  1. make out a balance sheet and profit and loss account in such form, containing such particulars and including or having annexed or attached thereto such documents as may be prescribed; Companies Act, 2013

Available at: < http://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf > accessed on 20 November, 2016

[11] Notification number S.O. 2463(E), dated July 19, 2016 available at:

< http://www.mca.gov.in/Ministry/pdf/Notification_19072016.pdf > accessed on 21 November, 2016

[12] Id 3, at 3

[13] Id 1, at 60

[14] Id 2, at 4

[15] …. an entity shall be considered as a 'startup'-

a) Up to five years from the date of its incorporation/registration,

b) If its turnover for any of the financial years has not exceeded Rupees 25 crores, and

c) It is working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property;

Provided that any such entity formed by splitting up or reconstruction of a business already in existence shall not be considered a 'startup';

Provided further that in order to obtain tax benefits a startup so identified under the above definition shall be required to obtain a certificate of an eligible business from the lnter-Ministerial Board of Certification consisting of:

a) Joint Secretary, Department of Industrial Policy and Promotion,

b) Representative of Department of Science and Technology, and

c) Representative of Department of Biotechnology.

As defined in Notification No. G.S.R. 180 (E) of the Ministry of Commerce and Industry (Department of Industrial Policy and Promotion) dated 17th February, 2016, available at: <http://dipp.nic.in/English/Investor/startupindia/Definition_Startup_GazetteNotification.pdf > accessed on 25 November, 2016

[16] Id 1, at 67

[17] Id 1, at 70

[18] Id 1, at 70

[19] Id 2, at 4

[20] Rule 15, Id 2, at 4

[21] Section 61: Power of limited company to alter its share capital

(1) A limited company having a share capital may, if so authorized by its articles, alter its memorandum in its general meeting to—

(a) increase its authorized share capital by such amount as it thinks expedient;

(b) consolidate and divide all or any of its share capital into shares of a larger amount than its existing shares:

Provided that no consolidation and division which results in changes in the voting percentage of shareholders shall take effect unless it is approved by the Tribunal on an application made in the prescribed manner;

(c) convert all or any of its fully paid-up shares into stock, and reconvert that stock into fully paid-up shares of any denomination;

(d) sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the memorandum, so, however, that in the sub-division the proportion between the amount paid and the amount, if any, unpaid on each reduced share shall be the same as it was in the case of the share from which the reduced share is derived;

(e) cancel shares which, at the date of the passing of the resolution in that behalf, have not been taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount of the shares so cancelled.

Available at < http://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf > accessed on 20 November, 2016

[22] Section 62: Further issue of share capital

(4) Notwithstanding anything contained in sub-section (3), where any debentures have been issued, or loan has been obtained from any Government by a company, and if that Government considers it necessary in the public interest so to do, it may, by order, direct that such debentures or loans or any part thereof shall be converted into shares in the company on such terms and conditions as appear to the Government to be reasonable in the circumstances of the case even if terms of the issue of such debentures or the raising of such loans do not include a term for providing for an option for such conversion:

Provided that where the terms and conditions of such conversion are not acceptable to the company, it may, within sixty days from the date of communication of such order, appeal to the Tribunal which shall after hearing the company and the Government pass such order as it deems fit.

(6) Where the Government has, by an order made under sub-section (4), directed that any debenture or loan or any part thereof shall be converted into shares in a company and where no appeal has been preferred to the Tribunal under sub-section (4) or where such appeal has been dismissed, the memorandum of such company shall, where such order has the effect of increasing the authorised share capital of the company, stand altered and the authorised share capital of such company shall stand increased by an amount equal to the amount of the value of shares which such debentures or loans or part thereof has been converted into.

Available at < http://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf > accessed on 20 November, 2016

[23] Rule 18 (1) (b), Id 1, at 75

[24] Rule 18 (1), Ibid

[25] Id 1, at 77

[26] Id 11


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