Category Archives: Companies Act 2013

Post written on the provisions of the (Indian) Companies Act, 2013 and matter incidental thereto

Transfer of Shares related to Unpaid Dividend

Ministry of Corporate Affairs recently amended Indian companies, the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016. The Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Second Amendment Rules, 2017 published in Official Gazette on 13th October 2017 and came into force on the same date. We discussed original rules here and earlier amended rules here.  In this post, we will discuss amended law related transfer of shares related to unpaid dividend to the Investor Education and Protection Fund Authority.

Due date for transfer

According to the combined reading of sub-section (6) and sub–section (5) of Section 124 of the Companies Act, 2013, transfer of shares to IEPF shall become due on completion of seven years from the date of transfer of dividend of first year (among these seven years) to Unpaid Dividend Account.

It is ==> Date of Declaration + 30 days + 7 days + 7 years (assuming all things done on last date of compliance.

However according to second proviso to sub – section (1) of amended rule 6 of these rules, in cases where the period of seven years provided under sub-section (5) of section 124 has been completed or being completed during the period from 7th September, 2016 to 31st May, 2017 31st October, 2017, the due date of transfer of such shares shall be deemed to be 31st May, 2017 31st October, 2017.

Deemed to be transmission

These Rules as well as the Companies Act, 2013 talks about the transfer of shares to Investor Education and Protection Fund. This transfer (as nomenclature) and its process faced many amendments and added confusion. Now, newly inserted third proviso declares this transfer as deemed to be transmission:

Provided further that transfer of shares by the companies to the Fund shall be deemed to be a transmission of shares and the procedure to be followed for transmission of shares shall be followed by the companies while transferring the shares to the fund.

Transfer of shares held in physical form

This was the second most contentious issue relating to the transfer of share to IEPF after the nomenclature itself. Again, clause (d) of sub – rule (3) of rules 6 substituted by these amended rules.

According to sub – clause (i) of clause (d) of sub – rule (3) of rules 6, the Company Secretary or the person authorised by the Board shall make an application, on behalf of the concerned shareholders, to the company, for the issue of duplicate share certificates. (No Change from earlier).

According to sub – clause (ii) of clause (d) of sub – rule (3) of rules 6, on receipt of the application under clause (a) [please, read this typographic error, which continue from original rules and survive from all these amendment, as sub – clause (i) of clause (d) of sub – rule (3) of rules 6], a duplicate certificate for each such shareholder shall be issued and it shall be stated on the face of it that this duplicate certificate is “Issued in lieu of share certificate No….. for purpose of transfer to IEPF” and the word “duplicate” shall be stamped or punched in bold letters on the first page of the share certificate. Such issue of the duplicate certificate shall be recorded in the register maintained for the purpose.

Now, stamping or punching requirement is not there. Now it may be typewritten also. This ease of doing business is a saving of cost of a stamp for companies and manual stamping.

The interesting thing here, original certificates shall be with the original shareholder. In case of sale which is otherwise legal, buyer has to “claim back” shares from IEPF as well through original shareholder.

According to sub – clause (iii) of clause (d) of sub – rule (3) of rules 6, particulars of every share certificate shall be in Form No. SH-1 as specified in the Companies (Share Capital and Debentures) Rules, 2014.

This is an interesting amendment as earlier rules inadvertently mentioned Form SH – 2 which is format for the Register of Renewed and Duplicate Share Certificates under Rule 6(3)(a) of the Companies (Share Capital and Debentures) Rules, 2014.

According to sub – clause (iv) of clause (d) of sub – rule (3) of rules 6 of the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016, after issue of duplicate share certificates, the company shall inform the depository by way of corporate action to convert the duplicate share certificates into DEMAT form and transfer in favour of the Authority. (No Change).

Account of IEPF

According to newly inserted sub – rule (13) of Rule 6, any amount required to be credited by the companies to the Fund as provided under sub-rules (10), (11) and sub-rule (12) shall be remitted to the specified account of the IEPF Authority maintained in the Punjab National Bank.

Report of IEPF Authority

According to newly inserted sub – rule (14) of Rule 6, the IEPF Authority shall furnish its report to the Central Government as and when noncompliance of the rules by companies came to its knowledge.


Quick Acceptance of Disqualification

The government of India in its crackdown against illicit money and money laundering marked 209,032 for removal of names from its register of companies as shell companies. It also disqualified about 200,000 directors. As happens with most bureaucratic exercises in India, present exercise also raised more questions than it answers. There is no definition of shell companies in Indian law. The term shell companies used widely to denote companies used as a vehicle for money laundering or criminal activities. The term itself denotes that main culprit may be someone else.

In April 2017, Registrars of Companies issued notices under section 248 to companies which “believed” to be not carrying on any business for a period of two immediately preceding financial years. The removal of the name of a shell company may be bliss for its promoters washing all sin done with it. Therefore, the belief of Registrar shifted to a new formula. Against the period of two immediately preceding financial years mentioned in section 248, the government linked it with Section 164(2)(a) – not filing of annual accounts and Annual Returns with Registrar of Companies for three or more years. Therefore, Registrar of Companies issue notices to companies whose annual filing was pending for financial years 2013 – 14, 2014 – 15 and 2015 – 16.  Notices were issued without discrimination including government companies and companies exempted from such removal. These exempted companies are listed in a proviso to Rule 3(1). This list includes; listed companies, delisted companies, vanishing companies, companies under investigation or inquiry, companies pending prosecution, companies pending compounding of offences, companies with public deposits, companies with a mortgage or pledge property, and not for profit companies. Not only these government and exempted companies, but Certain other companies, like companies with management or family disputes or companies having a dispute with auditors, failed to reply and faced removal of the name.

Soon after the removal of names of these companies, all Registrars started issuing lists of disqualified directors. This caused a shocker for directors of these companies and corporate India. These lists of disqualified directors were issued section 164(2)(a). According to this provision, no person who is or has been a director of a company which has not filed financial statements or annual returns for any continuous period of three financial years shall be eligible to be re-appointed as a director of that company or appointed in other company for a period of five years from the date on which the said company fails to do so.

Under present law, disqualification under section 164(2)(a) is automatic and no government or public notice of such disqualification is required. Even though government issued its list under section 164(2)(a), it played by reading it with Section 167(a). Experts believe that intention of the legislature while drafting section 167 must be to link it with sub – section (1) of section 164, not with complete section 164. This understanding was based on an obvious reason to facilitate completion of pending filings of the companies, where company otherwise is working fine. When all directors of companies vacate their offices and all possible incumbents will become disqualify at the moment of their appointment itself, how a company will work? Unless a competent court stays disqualification of its directors, companies may not come out of this tricky situation. It was not an issue of ease of doing business in India, but more likely an issue of removal of undue hardship. Instead of removing hardship for genuine cases, the government played with this otherwise a drafting issue.

The disqualification of a director is his private affairs with a limited access to companies in which he is or is going to be a director. Rule 14 of the Companies (Appointment and Qualification of Directors) Rule, 2014 explains this. According to Rule 14(1), every director shall inform the company concerned about his disqualification under sub-section (2) of section 164, if any, in Form DIR-8 before he is appointed or re-appointed. This is a need-based private procedure. The chance of issuing public notice of disqualification caused by non-filing of annual accounts and annual returns is extremely rare. According to rule 14(2), whenever a company fails to file the financial statements or annual returns, the company shall immediately file Form DIR-9, to the Registrar furnishing therein the names and addresses of all the directors of the company during the relevant financial years. According to rule 14(4), upon receipt of the Form DIR – 9 under sub-rule (2), the Registrar shall immediately register the document and place it in the document file for public inspection. Do we practically think a company which did not file more important documents and returns, shall file this form?

The Registrar of Companies has inherent powers to issue notices to a director or a company which fails to file these Form DIR – 8 and DIR – 9. In the present case, the government did not issue such notice as it may not fetch any result where companies already removed from the register of companies. The Government may issue such notices to these directors who are on boards of other companies. However, the government took an extra step.

Interestingly, government bring out lists of director disqualified under section 164 only and not claimed that these directors have vacated or have to vacate office under section 167. According to law, the vacation of the office held by these disqualified directors is automatic and need filing of return of cession of these directors by the company. The government may advise companies to file a return of cession of their directorship from companies in which such disqualified directors are directors. Instead, Government issued an advice to these disqualified directors not to file a form with their digital signatures. To enforce its advice, Government blocked digital signatures of these disqualified directors.

Government action may be called harsh. Even then, there is no hue and cry among promoters or directors of these stricken off companies. Is major proportion of these directors in a coma or long peaceful sleep? How one can explain this silence? One significant feature of shell companies is the separation of shareholding control from namesake day to day management. Most shell companies, like companies named in Panama Papers, have dummy directors. The move claimed to be targeted towards shell companies is unfortunately directed mostly to dummy directors. Governance in corporate India requires more hard work.

Unlimited Deposits for certain companies

Ministry of Corporate Affairs amended the Companies (Acceptance of Deposits) Rules, 2014 recently. The Companies (Acceptance of Deposits) 2nd Amendment Rules, 2017, was published and come into force on 20th September 2017. These amendment permit, in case of specified private companies, to accept deposit without any maximum limits.

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Subsidiaries Layers limited

The Patron Government of ease of doing business was earlier considered not favourable for corporate governance. After “successful” demonetization, government looking for all possible measure it seems necessary even though earlier not much liked by it. The enforcement of the provision of limiting layers of subsidiaries is one such law. Ministry of Corporate Affairs on 20th September 2017 notified Proviso to clause (87) of section 2 and –.

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Understanding Form DIR – 10

Many years ago one Hindu priest told me, those worshipping Laxmi ji (goddess of wealth) before without satisfying Ganesh Ji (god of goodness) may not get good wealth. We need to follow established a procedure to get the desired result. Without understanding utility of Form DIR – 10, its use may not give the desired result. Here, we will have a discussion.

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Remedies for disqualified directors of strike – off companies

Compliance way or Confine way! The Government made it clear. Directors who were on a long-term picnic after removal of names of their “shell companies” are now offered sleepless nights. I appreciate.

Ministry of Corporate Affairs issued two important lists in this regard –

  1. List Of Directors Associated With Struck Off Companies U/S 248
  2. List Of Disqualified Directors U/S 164 (2)(A)

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Arrest under Companies Act, 2013

The term, “Arrest”, though considered alien to corporate jurisprudence, occurs five times in Section 212 of the Companies Act, 2013 and once in section heading of Section 301. Ministry of Corporate Affairs on 24th August 2017 notified sub – section 8 to sub – section 10 of Section 212 of the Companies Act, 2013 and the Companies (Arrests in connection with Investigation by Serious Fraud Investigation Office) Rules, 2017.

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