New Company Law

A Paradigm Shift

Financial System

‘(h) “securities” include—

(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate – eg. FCCB, GDR, OFCD

(ii) Derivative like call options, put options, swaps, etc..

(iii) units or any other instrument issued by any collective investment scheme to the investors in such schemes Like MF units

(iv) security receipt under SARFESI

(v) units or any other such instrument issued to the investors under any mutual fund scheme ( but excludes ULIPs)

(vi) any certificate or instrument (by whatever name called), issued to an investor by any issuer being a special purpose distinct entity which possesses any debt or receivable, including mortgage debt, assigned to such entity, and acknowledging beneficial interest of such investor in such debt or receivable, including mortgage debt, as the case may be;]

(vii)Government securities;

(viii) such other instruments as may be declared by the Central Government to be securities; and]

(ix) rights or interest in securities;’

 

Norms Extended to all securities

Public offer Private Placement Transfer Transmission Maintaining Register Compulsory Listing Complying norms of Listing Insider Trading

Norms Extended to all securities

Dematerialisaton Minimum Subscription Allotment Nomination Role of Tribunal ‘ Auditor’s Role

Greater Role of Government

• Private Placement within its purview

• Disclosures in Prospectus

• Norms for GDRs

Tussle between Government and SEBI

• Section 24 prescribed SEBI’s powers

• CG has tried to encroach upon its power

• Power of investigation• SEBI debarred from

exercising powers which are given to CG under new Act

Anti Fraud Safeguards(AFS) –1

Fraud: Multiple Demat Accounts Stringent penalties for Fictitious Application

and Multiple Applications It is a fraud u/s 447 Liable for 6 months -10 years imprisonment Plus fine = amount of fraud upto 3

( amount of fraud)Plus Disgorgement

AFS2: Non Disclosures

F: In 2011, SEBI found that promoters and directors of companies like Taksheel Solutions, RDB Rasyans, Onelife Capital Advisors, Brooks Laboratories, PG Electroplast, guilty of not make adequate disclosures in their initial public offers

AFS: Government has retained powers to specify disclosures Any misstatement in prospectus constitutes a fraud – so fine and imprisonment Cognisable Offence Additional charges for damages in civil proceedings Unlimited liability of directors, experts, promoters, etc Person who authorised the issue – so even merchant bankers are under the garb

AFS3: Diversion of Funds

F: In most of cases stated in earlier slide, SEBI also found that companies had diverted inter-corporate deposits to entities (mostly inter financial intermediaries) that used the money to buy shares of these companies. These shares, which were illegally procured, were sold at a premium to the issue price on the first day of listing. It was also found that some of these company had also wrongly utilised IPO proceeds to fund the losses incurred by certain trading clients on the first day of listing. Merchant bankers and QIBs were accessories to these frauds.

AFS: Section 27: Variation in terms of Prospectus or in terms of contracts only by special

resolution Cannot use IPO proceeds for trading in shares of listed companies Exit offer to shareholders

AFS 4: Frauds by Financial Intermediaries

F: Misselling of financial Products is rampant. Many advisors give false promises of high returns.

AFS: Mis-selling is a fraud under company law Cognisable Offence It extends to any security Safeguards against mis-selling of mutual

funds is also included

AFS5: Sahara Case

F: In Sahara Case, huge funds were collected ( to the extent of 25,000 cr and above) By Sahara Group companies by exploiting the ambiguities under old Act

AFS: Section 42 : Private Placement

1. New norms

2. Concept made crystal clear

3. Stringent provisions

4. Stringent penalties

Private Placement

• Private Placement

• Of securities

• Select group of people

• Private placement offer letter

• Restriction of private placement in year

• Restriction of shares acquired by private placement

• Number of private placement

Private Placement

• Allotment Process

• Records and Disclosures

• Restriction of Fresh Offer

Prospectus

• Disclosures as per Government directions

• Shelf prospectus

• Applicable for securities

• Not applicable to GDR

Share Capital

• Types of shares unchanged • Norms for preference shares changed • Preference shares by infrastructure companies

can be redeemable beyond 20 years • Disabilities on account of default in redemption

of preference shares – Like inability to buy back • Voting Rights – no distinction between

cumulative and non cumulative voting rights

Variation in Voting Rights

• Consent of 3/4th or SR of the class

• New Safeguards for other shareholders

Analysis of New Safeguard

• The Act has inserted a proviso wherein now a company needs to take into consideration the wishes of other classes of shareholders whose ‘rights are affected’ by variation of rights of a class of shareholders.

• Will the approval be required only if the change has a negative impact on the shareholders? Or will it be required even if the change has a beneficial impact?

Analysis of New Safeguard

The meaning of the term ‘affect’ has to be explored to answer these questions. Various dictionaries have defined ‘affect’ as follows:

 Black’s Law Dictionary, Bryan A. Garner, Ninth Edition, 2009:

‘Most generally, to produce an effect on; to influence in some way….’

 Chambers 21st Century Dictionary:

‘to have an effect on someone or something.’ 

Transfer and Transmission

• Transfer of interest of member • Transfer of securities • Time limit for delivery of share certificate

cannot be extended • Free Transferability of all securities of public

company • Shareholders agreements recognised • Power to approach Tribunal for rectification

restricted only to members

Debentures

• Unchanged Conditions– convertible debentures after special resolution – DRRA – Redemption

• Changed Conditions – Failure to redeem – Specific Relief – Mandatory Appointment of Debenture Trustee

only above 500

Corporate Actions

• Shares at a Premium – 52

• Shares at a Discount cannot be issued

- interpreting discount to its price

• Powers to alter share capital – 61 - The approval of Tribunal is required if consolidation or division of shares into shares of a larger amount results in changes in the voting percentage of shareholders. This is likely when a company has issued shares with differential voting rights.

Rights Issue

• Offer can be kept open for a Maximum period of 30 days

• This provision not extended to securities

• Provision is applicable to private companies unless exempted

• No CG intervention if the company fails to get SR

ESOP

• Director/officers/employees – Company – Holding company – Subsidiary company

• ESOP can now be offered even to part time and non executive director

• ESOPs cannot be issued to Independent Directors

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Sweat Equity

• Date of commencement important

• Definition of company changed

Sweat Equity

• Can a dormant company issue sweat equity? - No

• Can one person company issue sweat equity shares? -

• Can sweat equity shares be issued for consideration other than cash to director?

• Can sweat equity shares be issued to promoters?

• Can sweat equity shares be issued at discount?

Sweat Equity• When can sweat equity shares be issued? - ‘commenced

business’.• However, under the new Act, the period of one year will

begin from the date the company has ‘commenced business’.

• What constitutes commencement of business? • Is the date of incorporation deemed to be the date of

commencement of business of the company? Or is it the date when the declaration and verification are filed under section 11 of the new Act?

• These questions are not answered in the Act. Thus, we have to go to the dictionary meaning to assess its true meaning.

• P Ramanatha Aiyer, - words commence and commencement of business

• ‘Commence: to begin; to originate; to cause to begin; perform the first act of, inter upon; to do the first act in anything; to take the first step...’

• ‘Commence any business: “commence any business” does not mean merely the business for which the company was started, but any transaction including, sale, purchase, etc.  ”

Bonus Shares

• Additional Conditions can be issued by Government

• Company cannot withdraw grant of bonus once declared

• Defaults – – payment of interest or principal in repect fixed

deposits – Statutory dues

Reduction of Capital

• Single Procedure • Representation of ROC/CG/SEBI• Certificate not a conclusive proof • Defaulters defaulting in repayment of deposits

are not entitled to discount • No “any reduced”• No specific authoritisation in Articles necessary • Auditors Certificate • Fraud on Creditors

Buy Back

• Subsequent buy back – One Year For Both

Types Of Buy Back

• Defaults – Subsisting – 3 years thereafter

• Additional fetters – Annual return – Declaration/distribution

of dividend – Financial statement

– Board report – CFS

• Serious implication of wring statements in Declaration of Solvency

• Odd lots

Thank you

• prachimanekar@gmail.com