On 1st February 2016, Ministry of Corporate Affairs uploaded the report of Companies Law Committee on its website here. In 3rd post on this report, we will discuss recommendations of the committee related to Incorporation and allotment of capital securities.
Before reading further, I would like to disclose that I was part of two groups; “Task Force on Companies Law” and “Research Group on Companies Law” constituted by the Institute of Company Secretaries of India. All view here are personal and not of these groups or ICSI.
I might have missed few points either because of no opinion or no comfort. I request, please feel free to add value of their views in comment section. No editing will be there as long as language is professional and parliamentary.
Object Clause [Section 4(1)(c)]
The Committee recommended that Section 4(1)(c) should be amended appropriately, to allow companies the additional option to have a generic object clause, i.e., “to engage in any lawful act or activity or business as per the law for the time being in force” in the MOA.
This is very good, timely, and “ease of doing business” suggestion. I have minor reservation, where company indicates its objects in its name, company should restrict to that main object only.
Civil Liability for Mis-statements in Prospectus [Section 35]
The Committee acknowledged that it would be appropriate to hold experts liable for statements prepared by them, and which the directors relied upon (as long as such experts were identified in the prospectus). Accordingly, an amendment in the provision was recommended.
This recommendation is certainly good. I fully support it. However, Directors should not be immune without scrutiny. I find a challenge here for professionals: Company Secretaries, Chartered Accountants, Advocates etc.
Private Placement Offer Letter [Section 42]
The Committee felt that the requirement under Section 42 and Rule 14 with regard to preparation and filing of Private Placement Offer Letter (PPOL) should be done away with and Form PAS-4 should be discontinued. In order to ensure that investor gets adequate information about the company which is making private placement, the disclosures made under Explanatory Statement referred to in Rule 13(2)(d) of Companies (Share Capital and Debenture) Rules, 2014, should be embodied in the Private Placement Application Form.
This may create risk; any document filed for public information with registry should be easily identifiable. To avoid multiple filing, instead of dispensing with PAS – 4, MGT – 14 may be dispense with. I completely disagree with this investor unfriendly recommendation.
In case of private placement of non-convertible debentures within the ceiling specified under Section 180(1)(c), the Board resolution under Section 179(3)(c) should provide for reasonable details about the proposed offer which should be specified in the application form in such cases.
The Committee recommended that, subject to the limit on the number of persons who could be made the offer of securities as prescribed under Section 42(2), a company could, at the same time keep open more than one issue of securities (that is, of equity share or preference share or debenture) in a year to such classes of investors as may be prescribed by Rules in order to provide greater flexibility in raising capital/loans while not compromising on regulatory concerns. Section 42(3) would also need to be made explicit about the simultaneous offering of securities of different kinds, as currently prescribed in the Rules.
The Committee felt that Section 42(7) could be modified to require that all offers covered under Section 42 shall be made only to such persons whose names, father’s names, addresses, phone numbers and email IDs, if any, or any other information as may be prescribed by rules are duly recorded by the company prior to the invitation to subscribe. These details need not, however, be filed with the Registry. The said information, however, could be asked by ROC/Inspector during any of the proceedings under Chapter XIV of the Act. However, in order to ensure that companies are accountable and transparent during private placement process, a new rule may be inserted in Chapter 3 Rules to the effect that companies would initiate circulation of application form and collect monies only after the relevant resolution (i.e. Special resolution or the Board resolution) is filed with the Registry. Consequential change in Rule 14(3) could also be made. Once the basic details like names, father’s names, addresses, phone numbers and email IDs, if any, are kept by the company, the requirement for PAS-5 can also be omitted.
This requirement may be relaxed as per the recommendation but public inspection of record and registers in this regard should be allowed.
The Committee recommends that since Non-Convertible Debentures are pure borrowings and do not form part of equity capital, the proviso to Rule 14(2)(a) may be amended to prescribe that the relevant board resolution under Section 179(3)(c) would be adequate in case the offer under Section 42 is for debentures up to the borrowing limits permissible for Board under section 180(1)(c) of the Act. This would also align the requirements with that of section 180(1)(c). It was, however, felt that the said Board resolution should clearly mention (in the body of the resolution) that the offer of debentures being approved by Board is through private placement under Section 42 and certain other minimum details as may be prescribed in the rules be provided in the Board resolution. Private companies (who have been given exemption from Section 117(3)(g) through section 462 notification) should either be required to file board resolutions under Section 179(3)(c) or pass a special resolution.
The Committee also felt that since the requirement for filing of PPOL and list/details of proposed offerees (i.e. PAS-5) with Registry within 30 days of circulation of PPOL is being dispensed with, companies should be required to file return of allotment (PAS-3) within the prescribed timeline, and should be liable for penalties under Section 42 in case of non-compliance. Further, it could be provided in the Act/Rules that companies would not be allowed to utilise the monies raised through private placement unless such return of allotment is filed. The underlying objective is to ensure that private placement process is completed within a finite period of 90 days.
The Committee further recommended that Section 42(1) may clearly provide that provisions of Section 42 and rules made thereunder shall also apply to offer of convertible securities referred to in Section 62(1)(c) read with Rule 13 of the Companies (Share Capital and Debenture) Rules, 2014.
Regarding valuation of convertible securities, the Committee felt that while the company should be mandated to get valuation done (in respect of equity and convertible securities), the report of the valuer should be made available to investors, and may not be filed/circulated. The company should retain the report with itself for making it available for regulatory purposes, as and when required. Further, Section 62(1)(c) and Rule 13(3) requiring price of securities to be decided in advance should be modified and provisions allowing pricing as per a formula (on the lines of RBI Regulation/FDI Policy) may be considered.
The Committee also felt that in case of equity or mandatorily convertible securities the minimum investment size can be twenty thousand rupees with no linkage to face value so that it can include premium amount as well. However, for private placement of non-convertible preference shares or non-convertible debentures the minimum investment size could be one lakh rupees with no linkage to face value.
It has been brought to notice that renunciation of rights is being used as a way to bypass the provisions of preferential allotment/private placement. The Committee, therefore, recommended that an accountable way of use of renunciation rights by shareholders needs to be prescribed. Reference was made to the principles contained in sections 755-756 of the English Companies Act, 2006, which could be used for regulation of private placement and preferential allotment under Companies Act, 2013 while making changes in Section 42/62 and rules made thereunder.
This is very good suggestion but not comprehensive need more deliberation.
The suggestions to limit the scope of Section 23 to shares instead of securities, limiting the exit option under Section 27(2) to dissenting shareholders, who had expressed specific dissent; linking the requirement of obtaining minimum subscription in a public issue to the date on which the issue opened, increasing the time limit to forty-five days under Section 39(3), and increasing the time limit of sixty days for the allotment of securities to one hundred and eighty days under Section 42 were also considered by the Committee. However, as the suggestions made were not in tune with the underlying principles and/or out-of-sync with the greater efficiencies or speed of businesses on date, the Committee did not recommend for any change to these sections.
Committee correctly observed to stick with 60 days. RBI is also aligning its FEMA provision with this company law provision.
Prohibition on Issue of Shares at Discount [Section 53(1)]
Committee recommended that the word ‘discount’, may replace the words “discounted price” in the provision.
I do not think that this recommendation may help unless term “price” be define. It seems committee is referring to “face value”.
Deposit insurance [Section 73(2)(d)]
It was also noted by the Committee that as on date none of the insurance companies is offering such insurance products. Considering the above situation, the Committee felt that the provisions of Section 73(2)(d) along with relevant Rules be omitted.
This is a very clear red flag. When insurance companies do not want to take risk in this highly unregulated market, how hard earned money of thousands of layman, small individual depositors may be put into risk. I recommend, Ministry of Corporate Affairs should immediately withdrawn from this Deposit segment and be put this deposit taking activity in domain of Reserve Bank of India. Until them, I will not recommend any investment deposits by individual investors in companies.
Registration of Charges [Section 77]
The Committee felt that there was no need for the definition of the term ‘charge’ to be changed, since relevant judicial precedents specified that charges included pledges. However, Section 77(3) may provide for prescriptive powers to allow certain liens or securities or pledges to be exempted from filing.
Requirement for registration of charges should be benefit driven. All charges are whether registered or not are and should be enforceable in law.
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