To file or not to file NFRA – 1 still a puzzle. It seems thumb rule, if you as body corporate file Form ADT-1, do not file NFRA – 1. We will try to understand the NFRA Rules, 2018, NFRA FAQs and the Form NFRA – 1.
Form BEN – 1 is a declaration by the beneficial owner who holds or acquires significant beneficial ownership in shares [Pursuant to section 90(1) of the Companies Act, 2013 and rule 2A and rule 3. Many readers requested its actual and understandable copy. I place it hereunder:
Form No. BEN-1
Declaration by the beneficial owner who holds or acquires significant beneficial ownership in shares [Pursuant to section 90(1) of the Companies Act, 2013 and rule 2A and rule 3]
To,
Name of the company: ____________________
Registered office address:_______________
1. Purpose of filing the form (choose anyone)
ID of the Significant Beneficial Owner: (To be allotted by MCA after filing form BEN – 2 first time by reporting company, same will be used for subsequent filings, therefore leave for the first time filling)
| Name of the Significant Beneficial Owner (Given name and last Name) | |
| Address and Email id | |
| Date of Birth/Age | |
| Father’s/ Mother’s/Spouse’s name | |
| Occupation | |
| Nationality | |
| Passport No. (in case of foreign national) |
Through Member 1
(a) Type of Member (Company/ LLP/Any other Body Corporate/HUF/ Partnership Firm/Discretionary Trust/Charitable trust/Specific Trust/Revocable Trust /Pooled Investment vehicle (PIV) / Entity controlled by PIV):
(b) Corporate Identity Number (CIN) or Limited Liability Partnership Identification Number (LLPIN) or any other registration number allotted by the regulator established under the Act:
(c) Name of the Member:
(d) Address:
(e) Nature of indirect holding or exercise of the right in the reporting company:
* By virtue of shares
* By virtue of voting rights in shares
* By virtue of rights on distributable dividend or any other distribution
* By virtue of the exercise of control (attach a copy of the agreement)
* By virtue of the exercise of significant influence (attach a copy of the agreement)
(f) Status of significant beneficial owner in the member of the reporting company (choose anyone):
* Individual in case of a company or any other body corporate
* Partner in case of partnership firm or LLP
* Karta in case of HUF
* Trustee in case of a discretionary trust or charitable trust
* Beneficiary in case of a specific trust
* Author or settlor in case of a revocable trust
* General Partner, Investment Manager or CEO in case of pooled investment vehicle or entity controlled by a pooled investment vehicle
(g) In case the member is a partnership firm or LLP, specify whether significant beneficial owner:
* is a partner holds
* majority stake in the body corporate partner
* holds the majority stake in the ultimate holding company of the body corporate partner
(h) In case the member is a company or any other body corporate, specify whether the significant beneficial owner holds:
* majority stake in such company or body corporate
* majority stake in the ultimate holding company of such company or body corporate
(i) Whether Significant Beneficial Owner has any direct holding or right in the reporting company:
* Yes * No
If yes, enter details below:
*By virtue of shares %
* By virtue of voting rights in shares %
* By virtue of rights on distributable dividend or any other distribution %
* By virtue of the exercise of control (attach a copy of the agreement)
* By virtue of the exercise of significant influence (attach a copy of the agreement)
<<Through Member 2
Repeat Para 3 again for member 2 and so on till all member though whom the significant beneficial owner has significant beneficial ownership exhausted>>
Date:
Place:
Signature of the holder of the significant beneficial interest
Attachments:
1.
2.
3. etc etc
Please note, where the Significant Beneficial Owner is aware and cooperating, she will fill and submit the form BEN – 1 by her own. Otherwise, the secretarial department of the reporting company shall dig layers of its all non-individual members and calculate holdings of all individuals behind these non-individual members.
Please also note, to get the true result, please do not ignore any individual behind any non-individual member because Significant beneficial owner may be hidden behind more one or even 100 non-individual members. MCA has given 10% holding limit to help reporting companies and save their time. Sometimes, we need to be thankful to MCA.
CS Aishwarya Mohan Gahrana
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Posted in Chapter VII – CA2013, Companies Act 2013
Tagged BEN-1, BEN-2, BEN-4, Beneficial Interest, Declaration of Significant Beneficial Ownership, Section 90 of the Companies Act 2013, Significant Beneficial Owner, Significant Beneficial Ownership, the Companies (Significant Beneficial Owners) Amendment Rules 2019, the Companies (Significant Beneficial Owners) Rules 2018, the Companies (Significant Beneficial Owners) Rules 2018 BEN-1, the Companies (Significant Beneficial Owners) Rules 2018 Beneficial Interest
Dhiraj Yadav, 4th Year Law Student, Dr. Ram Manohar Lohiya National Law University, Lucknow; and
Urvashi Gattani, 3rd year Law Student, ILS, Pune
Insolvency and Bankruptcy Code, 2016 has been severely tested since its enactment. However, constructive interpretation by the judiciary coupled with effective amendments to the Code has flooded the gates with teething issues.
In the instant case, Corporate Insolvency Resolution Process was initiated against ‘Essar Steel India Limited (“Corporate Debtor”), and pursuant to which the Committee of Creditors (“CoC”) approved the Resolution Plan submitted by ArcelorMittal India Pvt. Ltd.(‘Successful Resolution Applicant’) which was adjudged by NCLT, Ahmedabad Bench with certain modifications by the impugned order dated 8th March 2019. The successful resolution applicant in its resolution plan made the following categorisation:
Financial Creditors
(i) Secured Financial Creditors (having a charge on project assets of the ‘Corporate Debtor’);
(ii) Secured Financial Creditors (having no charge on project assets of the ‘Corporate Debtor’);
(iii) Unsecured Financial Creditors (with admitted claims less than Rs.10, 00,000);
(iv) Unsecured Financial Creditors (with admitted claims equal to or above Rs. 10, 00,000).
Operational Creditors
(i) Operational Creditors (workmen and employees);
(ii)The Operational Creditors (other than workmen and employees), but admitted claim amount is less than Rs. 1 Crore and
(iii) The Operational Creditors (whose admitted claim is equal to or more than Rs. 1 Crore).
According to the resolution plan, the first two categories of the operational creditors were proposed to be paid 100% of their dues, but the rest of the Operational Creditors whose claim admitted is Rs. 1 Crore or more, have been proposed with NIL amount i.e. 0% (zero per cent).
However, pursuant to this bifurcation numbers of appeals were preferred by the Operational Creditors and the Financial Creditors, on similar ground. These appeals were clubbed together to answer the question of law involved. The grievances of the Operational Creditors have been that in the resolution plan 0% of their debt has been proposed to be paid and claims of some of the Operational Creditors have been notionally assessed at Re. 1/- (average) by the ‘Resolution Professional’ without any basis.
Standard Chartered Bank (SCB) being one of the Financial Creditors, alleged that they were not equated with other Financial Creditors. All the Financial Creditors have been allowed 91.99% of their claim amount, whereas the claim of SCB has been categorised as-
The following Questions of Law arising from this appeal and the earlier preferred appeals have been answered by the Hon’ble NCLAT in this pertinent case:
Financial Creditors being Claimants at par with other Claimants like other Financial Creditors and the Operational Creditors having conflict of interest cannot distribute the amount amongst themselves that too keeping the maximum amount in favour of one or other Financial Creditors and minimum or ‘NIL’ amount in favour of some other Financial Creditors or the Operational Creditors. This violates Section 30 (2) and Regulation 38 (1A).
There is also discrimination made by CoC in the distribution of the proposed amount to Operational Creditors qua the Financial Creditors. The distribution is discriminatory and arbitrary. Classification of Financial Creditors is also discriminatory.
Therefore, Appellate Tribunal observed that as per the definition of the creditor in the Code, it includes a ‘Financial Creditor’, an ‘Operational Creditor’, a ‘Secured Creditor’, an ‘Unsecured Creditor’ and a decree-holder. Also as per the definition of Financial Creditor and Financial Debt (Section 5 (7)& (8), there is no distinction made between one or other ‘Financial Creditor’. All of such person form one class i.e. ‘Financial Creditor’ they cannot be sub-classified as ‘Secured’ or ‘Unsecured Financial Creditor’ for the purpose of preparation of the ‘Resolution Plan’.
The Hon’ble Appellate Tribunal held that the Operational Creditors can be classified for determining the manner in which the amount is to be distributed to them, they are to be given the same treatment if similarly situated.
Thus the classification of Operational Creditors in the Resolution Plan is upheld and not discriminatory as the Operational Creditors whose claim is more than Rs. 1 Crore or the ‘Central Government’ or the ‘State Government’ or the ‘Local Authority’, who raise their claim on the basis of the statutory dues, cannot ask for same treatment as allowed in favour of the Operational Creditors like employees or those who have ‘supplied goods’ and ‘rendered services’ having claim less than Rs.1 Crore, are provided with 100% dues of their claim amount.
A ‘Sub-Committee or ‘Core Committee’ is unknown and against the provisions of the IBC. There is no provision under IBC which permits constitution of a ‘Core Committee’ or ‘Sub-Committee’ nor the IBC or Regulations empowers the ‘Committee of Creditors’ to delegate the duties of the ‘Committee of Creditors’ to such ‘Core Committee’/ ‘Sub-Committee’.
Therefore, the Committee of Creditors’ cannot delegate its power to a ‘Sub Committee’ or ‘Core Committee’ for negotiating with the ‘Resolution Applicant(s)’. The manner of distribution of amount among various stakeholders is the exclusive domain of the Resolution Applicant.
The said provision makes it clear that the ‘Resolution Applicant’ in its ‘Resolution Plan’ must provide the amount it proposes to pay one or other Creditors, including the ‘Operational Creditors’ and the ‘Financial Creditors’ that means if the ‘Resolution Plan’ does not show the distribution amongst the ‘Financial Creditors’ and the ‘Operational Creditors’, it cannot be placed before the ‘Committee of Creditors’.
Conclusion
The Insolvency and Bankruptcy Code,2016 is experiencing a seesaw of judgments where time and again rights of Financial and Operational Creditors rights have been determined. As per this judgment following the precedents set up in the case of Binani Judgments and in Swiss Ribbons Financial and Operational Creditors have been treated at par. Amount earned during the process by the company, where the Resolution Applicant is not paying full, the profits have been given to the creditors – financial and operational. It has also serious relevance where the resolution plan has been approved and accepted by the lender whether the said lender has any rights left against the principal borrower under the guarantee or otherwise This judgment will have a far-reaching impact in the future when the law of precedent will be referred to.
Contact Detail: raodhiraj123@gmail.com
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On public demand, I am summarizing provisions relating to reporting company and the reported significant beneficial owners.[1]
Reporting Company under Rule 2(f) of SBO Rules, 2018 may be any company as defined under Section 2(20). According to Section 90(4), every company under shall report and file the return. For the practical purpose the return to the Registrar in respect of declaration under section 90Form BEN – 2 does not allow to fill the form if the company has no Significant Beneficial Owner.
Take Away 1: No return if no SBO. Read further to identify SBO.
The reporting company shall in all cases where its member (other than an individual), holds not less than ten per cent of its (a) shares, or (b) voting rights, or (c) right to receive or participate in the dividend or any other distribution payable in a financial year, give notice to such member, seeking information in accordance with subsection (5) of section 90, in Form BEN – 4. [Rule 2A]
Take Away 2: Identify Share not held by an individual (human) as a registered member or owner of beneficial interest. [Do not forget humans though, keep record]
Take Away 3: Send notice to every registered member or owner of beneficial Interest identified in Taka Away 2 having 10% of (a) shares, or (b) voting rights, or (c) right to receive or participate in the dividend or any other distribution payable.
Shares and share capital respectively includes Equity share with or without differential voting and/or other rights and Preference shares.
Voting right means the right of a member of a company to vote in any meeting of the company or by means of postal ballot. Generally, Preference share carries voting power in certain resolutions but where the dividend in respect of a class of preference shares has not been paid for a period of two years or more, such class of preference shareholders shall have a right to vote on all the resolutions placed before the company.
Right to receive dividend may be held by someone who is not a registered member.
Take Away 4: check your dividend distribution in the last two years to preference shareholders.
Take Away 5: calculated beneficial owners and the right to receive dividend or profit participation carefully.
Beneficial Interest in a share includes, directly or indirectly, through any contract, arrangement or otherwise, the right or entitlement of a person alone or together with any other person to—
(i) exercise or cause to be exercised any or all of the rights attached to such share; or
(ii) receive or participate in any dividend or other distribution in respect of such share. [Section 89(10)]
Take Away 6: Beneficial Interest is a wider term than a day to day understanding.
Every individual, who acting alone or together, or through one or more persons or trust, holds beneficial interests of not less than percentage as prescribed, in shares of a company or the right to exercise, or the actual exercising of significant influence or control over the company (herein referred to as “significant beneficial owner”), shall make a declaration to the company, specifying the nature of his interest and other particulars. [Section 90(1)]
Take Away 7: Stay focused on Section 90(1)
If an individual does not hold any right or entitlement indirectly under sub-clauses (i), (ii) or (iii), he shall not be considered to be a significant beneficial owner. [Explanation I to Rule 2(h)]
An individual shall be considered to hold a right or entitlement directly in the reporting company, if he satisfies any of the following criteria, namely:
(i) the shares in the reporting company representing such right or entitlement are held in the name of the individual;
(ii) the individual holds or acquires a beneficial interest in the share of the reporting company under sub-section (2) of section 89, and has made a declaration in this regard to the reporting company.
Take Away 8: individual members and other Individuals with ANY indirect holding or interests need to be identified.
The reporting company may have partial relief form reporting in respect of certain shares held by –
Take Away 9: Ignore Shares mentioned in Rule 8. Please seek information or send a notice in case of doubt.
To identify an SBO behind a Body Corporate Member; whether company, other bodies corporate, whether Indian or foreign, the reporting company shall identify the individual who
(a) holds the majority stake in that body corporate member; or
(b) holds the majority stake in the ultimate holding body corporate (whether incorporated or registered in India or abroad) of that member.
Take Away 10A: Go up to the steps of holdings body corporate till you find individual members. However, just for the purpose of reporting, identify the holder of a majority stake.
To identify an SBO behind a Hindu Undivided Family (HUF) identify the karta. Sometime the registered member may have shares in his name but the Hindu Undivided Family (HUF) is actual beneficial owner (through karta). The Karta shall be SBO.
Take Away 10C: Identify Karta in HUF.
To identify an SBO behind partnership entity – Limited Liability Partnership or Partnership Firm whether registered or not, the member of the reporting company is a partnership entity (through itself or a partner), and the SBO individual,-
(a) is a partner; or
(b) holds the majority stake in the body corporate which is a partner of the partnership entity; or
(c) holds the majority stake in the ultimate holding company of the body corporate which is a partner of the partnership entity.
Take Away 10C: In LLP and Partnership, identify the individual partners or SBO as per Take Away 10A where a partner is a body corporate.
To identify an SBO behind the trust, where the member of the reporting company is a trust (through the trustee), and the SBO individual –
(a) is a trustee in case of a discretionary trust or a charitable trust;
(b) is a beneficiary in case of a specific trust;
(c) is the author or settlor in case of a revocable trust.
Take Away 10D: In a trust, SBO individual may differ on a case to case basis.
To identify an SBO behind (a) Pooled Investment Vehicle; or (b) an entity controlled by the pooled investment vehicle, the SBO individual in relation to the pooled investment vehicle,-
(A) is a general partner; or
(B) is an investment manager; or
(C) is a Chief Executive Officer where the investment manager of such pooled vehicle is a body corporate or a partnership entity.
Take Away 10E: In pooled investment Vehicle, identify the decision-maker.
If any individual, or individuals acting through any person or trust, act with a common intent or purpose of exercising any rights or entitlements, or exercising control or significant influence, over a reporting company, pursuant to an agreement or understanding, formal or informal, such individual, or individuals, acting through any person or trust, as the case may be, shall be deemed to be ‘acting together’
Take Away 11: Identity individuals acting together.
Significant Influence means the power to participate, directly or indirectly, in the financial and operating policy decisions of the reporting company but is not control or joint control of those policies.
Take Away 12: Significant Influence may be taken care of.
“significant beneficial owner” in relation to a reporting company means an individual referred to in sub-section (1) of section 90, who acting alone or together, or through one or more persons or trust, possesses one or more of the following rights or entitlements in such reporting company, namely:-
(i) holds indirectly, or together with any direct holdings, not less than ten per cent. of the shares;
(ii) holds indirectly, or together with any direct holdings, not less than ten per cent. of the voting rights in the shares;
(iii) has right to receive or participate in not less than ten per cent. of the total distributable dividend, or any other distribution, in a financial year through indirect holdings alone, or together with any direct holdings;
(iv) has the right to exercise, or actually exercises, significant influence or control, in any manner other than through direct-holdings alone:
Take Away 13: After identifying all individual beneficial owners on all routes, you may find one individual in more than one place or a few individuals acting together.
If an individual does not hold any right or entitlement indirectly under sub-clauses (i), (ii) or (iii), he shall not be considered to be a significant beneficial owner.
Take Away 14: ignore all individuals holding rights or entitlements in the reporting company directly.
Take Away 15: List out individuals with indirect holdings or individuals having both direct and indirect holdings.
Now, compile the data in the required format. While compiling data, we may face many practical realities.
Special Take Away 1: One individual may have less beneficial ownership from in a single non-individual member but the combined effect of his all beneficial ownership may make him a significant owner.
Special Take Away 2: It is a reporting company which is in a better position to identify SBO then SBO himself, particularly where SBO using multiple member entities in the reporting companies.
Special Learning Point: Beneficial Interests and Beneficial ownership are two different ownership or interest aspect. Do not mingle them.
CS Aishwarya Mohan Gahrana
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[1] Please refer all of these posts for details:
[2] Mutual Funds (MFs), Alternative Investment Funds (AIF), Real Estate Investment Trusts (REITs), Infrastructure Investment Trust (lnVITs) and such other SEBI registered investment vehicles
Posted in Chapter VII – CA2013, Companies Act 2013
Tagged BEN-1, BEN-2, BEN-4, Beneficial Interest, Declaration of Significant Beneficial Ownership, Section 90 of the Companies Act 2013, Significant Beneficial Owner, Significant Beneficial Ownership, the Companies (Significant Beneficial Owners) Amendment Rules 2019, the Companies (Significant Beneficial Owners) Rules 2018, the Companies (Significant Beneficial Owners) Rules 2018 BEN-1, the Companies (Significant Beneficial Owners) Rules 2018 Beneficial Interest
Form BEN – 2 seems to be a comic strip name for kids but for Indian companies and company secretaries, it seems to be a just another nightmare of corporate governance. On 1st July 2019 BEN – 2 finally arrived. This BEN – 2 is an updated version introduced by the Companies (Significant Beneficial Owners) Second Amendment Rules 2019 with effect from the date of publication of the notification in the Official Gazette. In this post we discuss the Form BEN – 2 briefly. Continue reading
Posted in Chapter VII – CA2013, Companies Act 2013
Tagged BEN-1, BEN-2, BEN-4, Beneficial Interest, Declaration of Significant Beneficial Ownership, Section 90 of the Companies Act 2013, Significant Beneficial Owner, Significant Beneficial Ownership, the Companies (Significant Beneficial Owners) Amendment Rules 2019, the Companies (Significant Beneficial Owners) Rules 2018
With notification of the Companies (Incorporation) 6th Amendment Rules, 2019 on 7th June 2019 to come into force with effect from 15th August 2019, the Government of India further centralized incorporation and registration of new companies to Central Registration Centre, Manesar in Haryana. Let us discuss the law.
Politics is claimed to be a dirty game of propaganda in India and the public already accepted it as a reality of life. Unfortunately, Indian professionals start using similar tools against compliance regime and compliance professionals. Role of the media is also come to under strong protest recently. This is evident that Indian media do no research and do not cross verify the facts. Recently published propaganda titled “FM Nirmala Sitharaman urged to waive e-form 22A for firms” published by Deccan Chronicle on 12th June 2019 and copied by few others seems to be published without cross-checking on law and facts.
Posted in Chapter II - CA2013, Companies Act 2013
Tagged Company Secretaries, Company Secretary in Employment, Compliance Officer, Compliances, Deccan Chronicle, Ease of Doing Business, Form ACTIVE, Form INC-22A, Minister of Corporate Affairs, Ministry of corporate affairs, Nirmala Sitharaman, Shell Company, Whole Time Company Secretary
The Registration of Charges is always one of the most used but controversial and practically ignored chapters of the Indian company law. I personally never understood the utility of such registration except for a limited public notice in an era of Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI). Recent amendment in the law governing the registration of charge makes it more complicated and less user-friendly. Let us try to understand the amended law.
Application for removal of the name of the companies from the register of companies maintained by Company registrars has legal roots in Subsection (2) of Section 248 of the Companies Act, 2013 as discussed earlier here and now outdated. Rule 4 of the Companies (Removal of Names of Companies from the Register of Companies) Rules, 2016 deals with its procedural aspects which we discussed earlier here. Recently, the Companies (Removal of Names of Companies from the Register of Companies) Amendment Rules, 2019 amended Rule 4 significantly. We will discuss updated Rule 4 in this post.
[Law discussed in this post is as on 10th May 2019]
Recent Amendment in the National Company Law Tribunal (Second Amendment) Rules 2019 tries to complete the structure of law governing class action suits. We have much earlier here discussed class action suits under the Companies Act, 2013 and rules made thereunder. Here, we will have an updated post discussion the law as up to date 8 May 2019.
This is the continuation of earlier post written here. Now, the Ministry of Corporate Affairs deployed the updated Form DPT – 3 which is nodal form to file the return of deposits and “not deposits”.
In this post, we will analyse the updated Form DPT – 3 and try to solve the mystery what where and when to report in the return.
In a post “Return about Payment to MSME Suppliers” earlier here, we discussed two notifications regarding the half-yearly return on the amount of payment due beyond the statutory period of 45 days and the reason of such payment delay. We had a brief discussion in the notified form in that post. We will discuss the electronic version of the Form which is required to be filed now.
Posted in CHAPTER XXV - CA2013, Companies Act 2013
Among practitioners and followers of corporate law in India, the year 2019 brought a surprise in the form of Form INC – 22A. This was claimed to be a form to identify active companies and checking inactive companies. Unlike earlier attempt aim to boost the image of the country and government, this form lost its shine within few hours of its introduction. Unlike earlier, this form had no mention in government communications of success.
A director may be an employee in any organisation and may draw a salary from that other organisation. However, there may be two different situations –
Indian law does not prohibit outside employment by a director of a company outside its own company. The prospective employer will take a call whether one of its employees should continue to be a director in its own private company.
The prospective employer will pay the employee for his 100% quality working time and 100% quality services. Where prospective employer feels, the employees should not have any other responsibilities except that of employment and of personal life, it may ask the employee to resign from other responsibilities.
The underlying question shall always remain, will that employee be able to honestly devote his time and efforts for its prospective paymaster, the employer.
According to Section 166 of the Companies Act, 2013, a director has certain duties towards the company.
DUTIES OF DIRECTORS (SECTION 166):
If a director of the company contravenes the provisions of this section such director shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.
Where a director took employment outside the company, he needs to be careful in the performance of his duties towards the company. He needs to answer the following question to himself:
a. can he exercise his independent judgement in the decision making the process of the company?
b. is there any conflict of interest?
If yes, I do not find any restriction on his gainful employment.
However, a company may by way of Articles of Association restrict its directors from outside employment.
However, one should not sail in two boats unless both boats are compatible.
Unless a general election is crucial there is no purpose to conduct such a huge exercise. The best part of democracy is to give the opportunity for new ideas. Without going to any political prediction we will discuss possible post-election scenario after 23rd May 2019. This may help us to be prepared for the volatility of corporate law in India.
This is another experiment to achieve ease of doing business. I always pointed out combining so many forms into one without cutting numbers of licences required may not actually help businesses. Form – INC – 35 names as AGILE by the Ministry of Corporate Affairs is another such step. Whether a company under incorporation want to apply GST or not, it is required to fill and file Form AGILE. In this post, we will discuss the same.
Recently Ministry of Corporate Affairs has introduced a Form Active technically called Form INC – 22A. Noticeable features of this form are – (1) One time Form; (2) Requirement of latitude and longitude of Registered Office and (3) photograph of at least one director of the company. In this post, we will discuss the logic of this one time exercise and its logical future developments.
I received this interesting question on Quora and replied here. Other replies to the answer prompt me to post a short write up here on my blog. It seems it is a quite confusing and lesser explored area of most of us. We all students of corporate law at least once wonder about it and sometimes continue to do so.
The base question is – “How to decide voting rights of members in a guarantee company not having share capital?”
Here, before coming to the main question, it is prudent to discuss briefly the concept of the member under the Companies Act, 2013. Most of us use the terms members and shareholders as interchangeable. It is not so. All shareholders are generally members, but all members are not shareholders. When we say so, we usually think about shareholders pending registration of transfer or transmission. We miss 50% of the theoretical portion of the subject – Company limited by guarantee.
According to clause (55) of Section 2 the “member”, in relation to a company, means—
(i) the subscriber to the memorandum of the company who shall be deemed to have agreed to become a member of the company, and on its registration, shall be entered as a member in its register of members;
(ii) every other person who agrees in writing to become a member of the company and whose name is entered in the register of members of the company; and
(iii) every person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository.
Membership of a company may or may not be in the form of shareholding. Membership is transferable. In the case of a company limited by shares, a member may transfer his membership by transfer of share. In the case of a company limited by guarantee, a member may transfer his membership by just transferring membership. If a reader is confused about such transfer of share, he may just discuss himself about a transfer of shares not fully paid.
As I mentioned some of my earlier answers on the Quora and on my blog, a company limited by shares and a company limited by guarantee have no practical difference except one. A reader may look into the definition given here as the footnote[1].
May you for a moment consider a company having a share capital with all members decided to pay only at the time of liquidation or winding up. It is akin to a guarantee company. A company with uncalled unpaid shares has no practical difference with a guarantee company. ( see footnote [2])
The voting rights in a guarantee company may be decided on the basis of the ratio of guarantee or say the amount of percentage of guarantee given by a member against total guarantee given to the company by all member combine.
A, B, C and D may form a guarantee company by a promising guarantee of Re.5,000/, Rs. 15,000/-, Rs. 12,000 and Rs 8,000/-respectively. They may have respectively 5, 15, 12 and 8 votes in the General Meeting of the company.
Now, you may understand how to elect directors in general meeting other than first directors.
All practical provisions related to appointment of directors and passing any resolution shall remain the same.
Note -To my understanding, there will not be any differential voting rights in the guarantee company. Readers may also discuss the same.
[1] Two other important definitions in this regards are as under
(21) “company limited by guarantee” means a company having the liability of its members limited by the memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up.
(22) “company limited by shares” means a company having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them.
[2] It is a secondary thing that present law requires receiving of money shares subscribed in the memorandum of association by the promoters.
Corporate Social Responsibility becomes a bureaucratic and political method of harassment for Indian companies. It was introduced under “comply or explain” regime but now companies start receiving notices for not complying even if there is an explanation. Without any significant exception, authorities are finding explanations offered by companies inadequate. Recent reports suggest, CSR will virtually be a “comply or deferred comply” regime soon. Now, all critics of law backed voluntary corporate social responsibility now stand correct. Indian companies are facing “voluntarily compulsory” Corporate Social Responsibility, “Transparently Opaque” Electoral Bonds, “politely requested” political donations, as an extension of “extortionist” taxation system.
Before criticizing me for writing a hardcore anti-establishment post at this time of the general election, please check voting pattern of parties inside the parliament and tell me the difference of opinion among political parties on such legal loot. All are the same.
When I last checked Schedule VII of the Companies Act, 2013 as amended four times before being in present form, donation seems to be the best method of corporate social (ir)responsibility. Else a company may choose to fund a project established either by a well-connected politician, bureaucrat, businessperson or goon.
Present Schedule VII of the Companies Act, 2013 recommends the following funds –
Making a donation to these government funds are safe as it requires no planning, no responsibility, no social engagement, no notice, no worries, no explanation.
However, the concept of asking fund is nothing new.
Section 181 of the Act permits a company to contribute to Bona Fide and Charitable Funds etc.
Section 183 of the Act permits a company to contribute to the National Defence Fund or any other Fund approved by the Central Government for the purpose of national defence. I am happy to note in even in this hyper-nationalist and super patriotic time such donation to defence funds are not qualified to be a Corporate Social Responsibility.
Indian companies also permitted to make one more type of donation. This is under The Companies (Donations to National Funds) Act, 1951 (Act 54 of the year 1951). This forgotten Nehru era law came into force on 17th October 1951 and still operative with an objective to enable companies to make donations to national funds.
The Companies (Donations to National Funds) Act, 1951 has only one operative Section. Section 4 of this Act[1] permits Indian companies to donate to –
It seems nothing was yet notified any other approved fund.
There is another law passed by the state of Gujarat referring to the Gandhi National Memorial Fund (Local Authorities Donations) Act, 1953. There is little information about this fund. Some source suggested that with an amount of $130 million it was once “perhaps the largest, spontaneous, mass monetary contribution to the memory of a single individual in the history of the world.
Sardar Vallabhbhai National Memorial Fund seems to have the same fate now. We have a great statue in the name of the great leader.
This Act is now a law in a legal coma due to a need for political correctness and corporate irresponsibility of few time donations.
I am referring to such a history of legally backed corporate donations to national funds to prove my point. This is the worst method to be socially responsible.
{Note – bura na mano holi hai – take it easy on Indian festival Holi}
[1] Section 4 of this Act read as under –
Any company may, notwithstanding anything contained in the Companies Act or in any other law for the time being in force regulating the affairs thereof, and notwithstanding that the memorandum or articles of association of the company do not enable it so to do, by an extraordinary resolution passed in accordance with the provisions contained in section 81 of the Companies Act, authorise the making of donations to the Gandhi National Memorial Fund or the Sardar Vallabhbhai National Memorial Fund, or to any other Fund established for a charitable purpose which by reason of its national importance has been approved by the Central Government for the purposes of this section.
Posted in Chapter IX - CA2013, Companies Act 2013
Tagged Clean Ganga Fund, Corporate Social Res, CSR, CSR Fund, donation, Gandhi National Memorial Fund, National Funds, Prime Minister's National Relief Fund, Sardar Vallabhbhai National Memorial Fund, Swach Bharat Kosh, The Companies (Donations to National Funds) Act 1951
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AishMGhrana 