Amendments to Companies Act and some relief to Permitted Startups

With the ability to modify the guidelines quick and fast, Companies Act has become dynamic. On 19 July 2016, the Ministry of Corporate Affairs notified the Companies (Share Capital and Debentures) Third Amendment Rules 2016 (Amendment) to amend certain provisions of the Companies (Share Capital and Debentures) Rules 2014 (Rules). These Rules contain the procedures for issuance of shares and debentures and disclosures to be made.
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Notes of the Amendments made:

1. Relaxation of preferential allotment process:
Earlier to these amendments, any securities issued through the ‘private placement’ process had to be fully paid up at the time of allotment. This infact was an anomaly, because, if the company chose a ‘right issue’ process, then it was possible to issue partly paid shares. The amendment now seeks to set this anomaly right and made it possible to issue partly-paid shares even through private placement process.

2. Determination of conversion price:
Earlier to these amendments, a company issuing convertible securities had to determine the conversion price at the time of issuance. This is true for any foreign direct investment as well. Now, companies may either determine the conversion price (a) upfront at the time of offering the convertible securities, or (b) not later than 30 days prior to the date the holder of convertible securities becomes entitled to convert such convertible securities, based on a valuation report of a registered valuer issued not later than 60 days prior to such date. The change in the foreign direct investment guidelines is still the same and it has to be notified to RBI at the time of issuance.

3. Issue of secured debentures:
Earlier to these amendments, a company could provide only its own assets and properties as a security for issuance of secured debentures. Now, the companies can issue secured debentures by creating a charge on the assets and properties of its subsidiaries, holding company or associate companies. The amendment expressly permits companies intending to redeem their debentures prematurely to transfer such amounts in excess of the limits specified under the Rules as may be necessary to the Debenture Redemption Reserve.

4. Issue of equity shares with differential rights:
Earlier, companies could not issue equity shares with differential rights if they defaulted in (a) the payment of dividends on preference shares, (b) the repayment of a term loan (or interest thereon) from specified institutions, (c) the payment of statutory dues relating to employees, or (d) crediting prescribed amounts in the Investor Education and Protection Fund. Now, such defaulting companies to issue equity shares with differential rights after 5 years from the end of the financial year in which they make good the default. It would have been nice, that a company could issue such shares immediately upon compliance.

5. Sweat equity shares by Permitted Start-ups:
Start-ups (as defined in notification number GSR 180(E) dated 17 February 2016 issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India – “Permitted Startups”) are now permitted to issue sweat equity shares up to 50% of their paid-up capital for the first 5 years from the date of their incorporation. For other companies, this limit continues to be 25%.

6. Stock options to promoters and shareholder-directors of the Permitted Start-ups:
Permitted Start-ups can issue stock options to their promoters and to directors who hold more than 10% of the start-up’s equity shares for the first 5 years from the date of their incorporation. The restriction on issuing stock options to promoters and such directors continues for all other companies, who are not Permitted Startups.

7. Form SH-7 by companies not having share capital:
The Amendment requires that Form SH-7, for intimating any alteration of a company’s authorised share capital, be filed by companies that do not have share capital in case of an increase in the number of members.

Author: Venkatesh Vempati, works as an Associate with the Compliance Team

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