P. K. PANDYA & CO. Practising Company Secretary

www.pkpandya.com

BUZZ ON CORPORATE LAWS

July 2014 (Part 2)

Contents THE COMPANIES ACT, 2013 .................................................................................................... 1

New Circulars of MCA: ................................................................................................................. 1

Notification issued: ...................................................................................................................... 6

Reserve Bank of India....................................................................................................................... 7

Amendment in Foreign Exchange Management (Permissible Capital Account

Transactions) Regulations, 2000 ............................................................................................ 7

Amendment in Foreign Exchange Management (Transfer or Issue of Security by a

Person Resident outside India) Regulations, 2000 .............................................................. 8

Restoration of limit of Financial Commitment (FC)/ Overseas Direct Investments (ODI)

by Indian Party ........................................................................................................................... 8

Foreign investment in India by SEBI registered long term investors in Government dated

securities ......................................................................................................................................... 8

Issue of Partly Paid Shares and Warrants by Indian Company to Foreign Investors..... 9

Revised Pricing Guidelines for issue/transfer of shares or convertible debentures ....... 9

Reporting under FDI Scheme – Switch over of NIC codes ................................................ 9

SEBI .............................................................................................................................................. 10

Circular on extension of timeline for alignment of employee benefit schemes with the

SEBI (ESOS and ESPS) Guidelines, 1999 ......................................................................... 10

Monitoring of Compliance of listing agreement by Stock Exchanges ....................................... 10

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THE COMPANIES ACT, 2013

New Circulars of MCA:

1. General circular 30: Clarification on matters relating to related party

transactions

(a) Scope of second proviso to Section 188(1):

Second proviso to sub-section (1) of section 188 requires that no member of the

company shall vote on special resolution to approve the contract or arrangement

(referred to in first proviso), if such member is a related party.

It is clarified that ‘related party’ referred to in the second proviso has to be

constructed with reference only to the contract or arrangement for which the said

special resolution is being passed. Prior to this clarification, term ‘related party’ as

defined under the Act was resorted to.

Thus, it has come as a great relief that the term ‘related party’ in the above context

refers only to such related party as may be a related party in the context of the

contract or arrangement for which the said special resolution is being passed, and

does not cover all persons covered under its definition.

(b) Applicability of section 188 to corporate restructuring, amalgamation

etc.:

It is clarified that transaction arising out of Compromises, arrangements and

amalgamation dealt with under specific provisions of the Companies Act, 1956/the

Companies Act, 2013, will not attract the requirements of the section 188 of the

Companies Act, 2013.

This is a relief to corporate as it avoids duplication of efforts. All such transactions

are already subject to specific approvals from court as well as court convened

meeting of shareholders before they are effective.

(c) Requirements of fresh approval for past contract under section 188:

Contract entered into by companies, after making necessary compliances under

Section 297 of the Companies Act, 1956 before the commencement of Section

188 of the Companies Act, 2013, will not require fresh approval under the said

section 188 till the expiry of the original term of such contracts.

Thus, if any modification in such contract is made on or after 1st April, 2014, the

requirements of under Section 188 will have to be complied with.

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For copy of aforesaid circular no.30, click here.

General Circular 29: Registration of names of the companies shall be in

consonance with the provision of the Emblems and Names (Prevention of

Improper Use) Act, 1950

While allotting names to Companies/Limited Liability Partnerships, the Registrar of

Companies concerned is directed by MCA to exercise due care to ensure that the

names are not in contravention of the Provision of the Emblems and Names

(Prevention of Improper Use) Act, 1950.

For copy of circular no. 29, click here.

General Circular 26: Clarification with regards to use of words ‘Commodity

Exchange’ in a company registration

It is clarified the use of the word "Commodity Exchange" may be allowed only

where a "No Objection Certificate" from the Forward Markets Commission (FMC)

is furnished by the applicant and all other provisions of the Companies

(Incorporation) Rules, 2014 will continue to be applicable.

It is also clarified that the certificate from Forward Markets Commission will also

be required in cases of companies registered with the words "Commodity

Exchange' before the issue of this circular.

For copy of circular, click here

General Circular 28: Clarification of MGT-14 through STP mode (effective

from 21st July, 2014):

Form MGT-14 shall be taken on record using the Straight Through Process (STP)

mode in all cases, except for the following:

1. Change of name

2. Change of object

3. Resolution of further issue of capital and

4. conversion of companies

For copy of circular no. 28, click here.

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General circular 25: Clarification on applicability of requirement for resident

director.

1. It is clarified that the 'residency requirement' would be reckoned from the

date of commencement of section 149 of the Act i.e. 1st April, 2014. The

first 'previous calendar year' for compliance with these provisions would,

therefore, be Calendar Year 2014. The period to be taken into account for

compliance with these provisions will be the remaining period of calendar

year 2014 (i.e. 1st April to 31st December). Therefore, on a proportionate

basis, the number of days for which the director(s) would need to be

resident in India, during Calendar Year 2014, shall exceed 136 days.

2. Regarding newly incorporated companies it is clarified that companies

incorporated between 1.4.2014 to 30.9.2014 should have a resident director

either at the incorporation stage itself or within six months of their

incorporation. Companies incorporated after 30.9.2014 need to have the

resident director from the date of incorporation itself.

For copy of circular, click here.

General Circular: 24 Clarification with regard to holding of shares in a

fiduciary capacity by associate company under section 2(6) of the

Companies Act, 2013.

It is clarified that the shares held by a company in another company in a 'fiduciary

capacity' shall not be counted for the purpose of determining the relationship of

'associate company' under section 2(6) of the Companies Act, 2013.

For copy of circular, click here.

General circular: 23 Clarification relating to status of a subsidiary company

setup in India by a foreign company.

It is clarified that there is no bar in the new Act for a company incorporated outside

India to incorporate a subsidiary either as a public company or a private company.

An existing company, being a subsidiary of a company incorporated outside India

registered under the Companies Act, 1956, either as private company or a public

company by virtue of section 4(7) of that Act, will continue as a private company

or public company, as the case may be, without any change in the incorporation

status of such company.

For copy of circular, click here.

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General circular 32: Clarification on transitional period for resolutions

passed under the Companies Act, 1956.

MCA has clarified that all resolutions approved or passed by companies under

relevant applicable provisions of the Old Act during the period from 1st September,

2013 to 31st March, 2014, can be implemented, in accordance with provisions of

the Old Act, notwithstanding the repeal of the relevant provision subject to the

conditions that

(a) the implementation of the resolution actually commenced before 1st April, 2014;

and

(b) this transitional arrangement will be available upto expiry of one year from the

passing of the resolution or six months from the commencement of the

corresponding provision in New Act, whichever is later.

But if there is any amendment in the resolution, then the same shall be in

accordance with the provisions of the Companies Act, 2013.

For copy of circular, click here

General Circular: 22 Clarification with regard to format of annual return

applicable for Financial Year 2013-14 and fees to be charged by companies

for allowing inspection of records.

1. It is, clarified that Form MGT-7 shall not apply to annual returns in respect

of companies whose financial year ended on or before 1st April, 2014 and

for annual returns pertaining to earlier years. These companies may file

their returns in the relevant Form applicable under the Companies Act,

1956.

2. Until the requisite fee is specified by the companies, the inspections of

records under Rule 14(2) and Rule 16 of the Companies (Management and

Administration) Rules, 2014 could be allowed without levy of fee.

For copy of circular, click here.

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General circular: 21 Clarifications with regard to provisions of Corporate

Social Responsibility under section 135 of the Companies Act, 2013.

The Ministry has clarified on the provisions of Section 135 of the Companies Act,

2013 and the Companies (Corporate Social Responsibility Policy) Rules, 2014, as

well as activities to be undertaken as per Schedule VII of the Companies Act, 2013.

For copy of circular, click here.

General circular 33: Clarification with regard to applicability of provisions of section 139(5) and 139(7) of the Companies Act, 2013 MCA has clarified that deemed Government companies would be covered under subsection (5) and (7) of section 139 of the Companies Act, 2013 Further, it has also been observed that the words " any other company owned or controlled, directly or indirectly ……… by the Central Government and partly by one or more State Governments” appearing in sub-sections (5) and (7) of section 139 of the New Act are to be read with the definition of ‘control' in section 2(27) of the New Act. Thus documents like articles of association and shareholders’ agreements etc. envisaging ‘control’ under section 2(27) are to be taken into account while deciding whether an individual company, is covered under section 139(5)/ 139(7) of the New Act. It is also clarified that it shall be responsibility of the company concer to intimate to the Comptroller and Auditor General of India (C&AG) about its incorporation along with name, location of registered office, capital structure of such a company immediately on its incorporation. The company concerned shall also intimate to the relevant Government so that such Government may also send a suitable request to the C&AG. Comments: There was a doubt relating to applicability of section 139(5) and 139(7) of the Companies Act, 2013 to “deemed government companies” with respect to appointment of auditors by Comptroller and Auditor General of India (C&AG) since the new act does not contain any specific provisions about deemed government companies on the lines of section 619B of the Companies Act, 1956. Now, it has been clarified vide this circular that deemed government companies are covered under section 139(5) and 139(7) of the Companies Act, 2013. For copy of circular, click here.

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Notification issued:

Non-applicability of first proviso of section 203(1) The first proviso to section 203(1) of the Act states that an individual shall not be appointed or reappointed as the chairperson of the company, in pursuance of the articles of the company, as well as the managing director or Chief Executive Officer of the company at the same time after the date of commencement of this Act unless, (a) the articles of such a company provide otherwise; or (b) the company does not carry multiple businesses shall not be applicable to such class of companies. MCA has notified that the first proviso to section 203(1) of the Act shall not apply to those public companies which are engaged in multiple businesses and having (a) paid-up share capital of rupees one hundred crore or more; and (b) annual turnover of rupees one thousand crore or more; and (c) have appointed Chief Executive Officer for each such business as per second proviso to sub-section (1) of Section 203 of the said Act. For the above provisions, the paid-up share capital and the annual turnover shall be decided on the basis of the latest audited balance sheet. For copy of notification dated 25th July, 2014, click here. Amendment in Schedule VII of Companies Act, 2013 In Schedule VII, one new activity of slum area development has been notified which can be included by the companies in their Corporate Social Responsibility Policies. By way of explanation it is clarified that the term 'slum area' shall mean any area declared as such by the Central Government or any State Government or any other competent authority under any law for the time being in force. For copy of notification dated 6th August, 2014, click here.

The Companies (Meetings of Board and its Powers) Second Amendment

Rules, 2014

(a) In case of Board meetings conducted through video conference or audio-visual

means, it is not mandatory that the venue of the meeting as stated in the notice

convening meeting shall be in India. Prior to the amendment, the Rules stated that

it shall be in India.

(b) for transactions with related party, limits for transactions under section 188(1) has been changed from 14th August, 2014 as under:

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(i) Sale, purchase or supply of any goods or materials directly or through

appointment of agents, Earlier limit was exceeding 25% of Annual Turnover, which has changed to exceeding 10% percent. Of the turnover of the company or rupees one hundred crore, whichever is lower,

(ii) Selling or otherwise disposing of, or buying, property of any kind directly or through appointment of agents, earlier limit was Exceeding 10% of Net worth, now changed to Exceeding 10% of Net worth or Rupees 100 Crore Whichever is Lower

(iii)Leasing of property of any kind, earlier limit was Exceeding 10% of Annual Turnover OR Exceeding 10% of Net worth, now changed to Exceeding 10% of the Net worth of company or 10% of Turnover of Company of Rupees 100 Crore, Whichever is lower.

(iv) Availing or rendering of any services directly or through appointment of agents, earlier limit was Exceeding 10% of Net worth, now changed to Exceeding 10 % of Turnover of company or Rupees 50 Crore, Whichever is lower.

It is clarified that the limits specified in sub-clauses (i) to (iv) shall apply for

transaction or transactions to be entered into either individually or taken together

with the previous transactions during a financial year.

Some drafting errors are also corrected. For copy of notification dated 14th August, 2014, click here.

Reserve Bank of India

Amendment in Foreign Exchange Management (Permissible Capital Account

Transactions) Regulations, 2000

The limit on drawal of foreign exchange by a resident individual for a capital

account transaction has been increased from USD 75000 to USD 125000 per

financial year.

[Notification No. FEMA. 311/2014-RB dated June 24, 2014] For the RBI notification,

click here

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Amendment in Foreign Exchange Management (Transfer or Issue of Security

by a Person Resident outside India) Regulations, 2000

An Indian Company can issue to a person resident outside India warrants. Until

now Indian companies were permitted to issue shares or convertible debentures.

[Notification No. FEMA. 308/2014-RB dated June 30, 2014] For the RBI notification,

click here

Restoration of limit of Financial Commitment (FC)/ Overseas Direct

Investments (ODI) by Indian Party

RBI has decided to restore the limit of Overseas Direct Investment/Financial

Commitment (i.e. 400% of the net worth) to be undertaken by an Indian Party under

the automatic route. But if an Indian party undertakes any financial commitment

exceeding USD 1 billion or its equivalent in any financial year, then in that case the

Indian party is required to obtain prior approval of the Reserve Bank even if the

total FC is within the eligible limit i.e. 400% of the net worth.

[A.P. (DIR Series) Circular No.1 dated July 3, 2014] For the RBI Circular, click here

Foreign investment in India by SEBI registered long term investors in Government dated securities

The investment limit in government securities has been enhanced by USD 5 billion

by correspondingly reducing the amount available to long term investors from USD

10 billion to USD 5 billion within the overall limit of USD 30 billion.

The investment limit of USD 5 billion shall be invested in government bonds with

a minimum residual maturity of three years. There will be no lock-in period and

FIIs/QFIs/FPIs shall be free to sell the securities to the domestic investors.

[A. P. (DIR Series) Circular No. 13 dated July 23, 2014] For RBI circular, click

here

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Issue of Partly Paid Shares and Warrants by Indian Company to Foreign

Investors

Equity shares or compulsorily and mandatorily convertible preference

shares/debentures containing an optionality clause but without any option/ right to

exit at an assured price were recognized as FDI compliant instruments.

Now, party paid equity shares and warrants issued under the Companies Act, 2013

and the SEBI guidelines shall also be recognized as eligible instruments for the

purpose of FDI and foreign portfolio investment (FPI) by Foreign Institutional

Investors (FIIs)/Registered Foreign Portfolio Investors(RFPIs) subject to

compliance with FDI and FPI schemes

Thus, an Indian Company can issue party paid equity shares and warrants subject

to compliance with several conditions.

NRIs shall also be eligible to invest on non - repatriation basis in the above

securities in accordance with the provisions of the Companies Act/ SEBI guidelines

/ Income tax provisions, as applicable.

[A.P.(DIR Series) Circular No. 3 dated July 14, 2014] For the RBI circular, click here

Revised Pricing Guidelines for issue/transfer of shares or convertible

debentures

In order to provide greater freedom and flexibility to the parties concerned under

the FDI framework, the revised pricing guidelines has been notified for the purpose

of issue/transfer of shares or convertible debentures.

Now, the pricing of shares shall be done as per any internationally accepted pricing

methodology for valuation of shares on arm’s length basis instead of discounted

free cash flow method in case of shares of an unlisted company.

[A. P. (DIR Series) Circular No. 4 dated July 15, 2014] For the RBI circular, click here

Reporting under FDI Scheme – Switch over of NIC codes

Indian companies are henceforth required to report the NIC codes as per NIC 2008 version in Form FCGPR and Form FC-TRS. This is in line with DIPP, Ministry of Commerce switching to NIC 2008.

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RBI has also introduced a uniform State and District Code list for reporting of FDI details in Form FCGPR. [A.P. (DIR Series) Circular No. 6 dated July 18, 2014] For the RBI circular, click

here.

SEBI

Circular on extension of timeline for alignment of employee benefit schemes

with the SEBI (ESOS and ESPS) Guidelines, 1999

SEBI vide its circular dated November 29, 2013 had extended the time limit for

alignment of employee benefit schemes with the SEBI (ESOS and ESPS)

Guidelines, 1999 till June 30, 2014.

Now, SEBI has extended the above mentioned time limit till the new regulations

shall come into force as and when notified. Thus, the prohibition on acquiring

securities from the secondary market shall continue till the existing schemes are

aligned with the new regulations.

For the Circular, click here.

Monitoring of Compliance of listing agreement by Stock Exchanges

SEBI, earlier vide its circulars dated September 30, 2013 and November 18, 2013

has put in place a system to monitor and review the compliance of listing conditions

by listed companies and to devise framework to detect any non- compliance /

violation of the applicable laws.

All listed companies shall mandatorily comply with the Principles of Corporate

Governance as per amended Clause 49 of the listing agreement. As per the said

principle, all the shareholders of the company shall participate and vote effectively

in general meetings of the company.

SEBI has observed that some listed companies belonging to the same group are

holding AGMs within a time gap of 15 minutes between two AGMs. The allocation

of 15 minutes for conducting AGM does not appear to be adequate enough to

facilitate a constructive discussion on various matters transacted at the AGM.

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Hence, SEBI has advised all recognized stock exchanges to set up and equip

monitory framework and shall ensure that the principle of corporate governance

are followed by all the listed companies in letter and spirit.

This circular will be effective from 1st October, 2014

For copy of circular, click here.