Category Archives: regulatory updates

Changes in Eligibility Criteria for Class Action Application

The Ministry of Corporate Affairs (“MCA”) on 08 May 2019 amended the National Company law Tribunal Rules, 2016, (“Rules”) which will streamline the provisions of Rule 84 of the said Rules (i.e. Right to apply under the Companies Act in case of Oppression and Mismanagement) and Section 245 (Class Action) of the Companies Act, 2013 (the Act).

While reading Section 245(1) of the Act together with the amended Rules it can be derived that following classes of members or depositors can Class Action under Section 245 of the Act before the National Company law Tribunal for seeking its order:

Category Criteria
In case of a company having a share capital The application shall be made by at least:

(a) 5% of total members or 100 members, whichever is less; or

(b) In case of an unlisted company, members holding at least 5% of issued share capital; or

(c) In case of a listed company, members holding at least 2% of issued share capital.

In the case of a company not having a share capital The application shall be made by atleast one-fifth of the total number of its members.
In case applicants are Depositors The application shall be made by at least:

 

(a) 5% of the total number of depositors or 100 depositors, whichever is less; or

(b) Depositors to whom the company owes 5% of total deposits of the company.

 

Source: http://www.mca.gov.in/Ministry/pdf/AmendmentRules1_08052019.pdf

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Changes in the process of Strike-off of the Companies

The Ministry of Corporate Affairs (“MCA”) on 8 May, 2019 has notified the Companies (Removal of Names of Companies from the Register of Companies) Amendment Rules, 2019 (“Amendment Rules”) which shall come into effect from 10 May, 2019. The Amendment rules provides for the following changes:

(a) Explicit requirement of filing the Annual Forms

(i) The MCA vide this amendment has clarified that Companies have to file their overdue returns in AOC-4, AOC-4 XBRL and MGT-7 before filing an application in Form No. STK-2 with the Registrar of Companies (the RoC).

(ii) Company shall not be able to file Form No. STK-2, once it has received the notice of strike-off in Form No. STK-7 from the RoC.

(iii) The statutory fee for making an application for strike off has been increased to INR 10,000.

(b) List of documents to be filed with the RoC.

The application for removing the name of the Company from the RoC in Form No. STK-2 shall be accompanied by the following documents:

  1. indemnity bond (duly notarised) in Form STK 3;
  2. a statement of accounts containing assets and liabilities of the company made up to a day, not more than thirty days before the date of application and certified by a Chartered Accountant;
  • An affidavit in Form STK 4 by every director of the company;
  1. a copy of the special resolution duly certified by each of the directors of the company or consent of seventy-five per cent of the members of the company in terms of paid-up share capital as on the date of application;
  2. a statement regarding pending litigations, if any, involving the company.

As per the amendment rules, the aforementioned statement of accounts shall now be provided in Form No. STK-8 (the format of which has been provided in the Annexure to the principal rules).

Source: http://mca.gov.in/Ministry/pdf/AmendmentRules_08052019.pdf

Notification of Companies (Acceptance of Deposits) Second Amendment Rules, 2019

The Ministry of Corporate Affairs (the MCA) vide its Notification dated 30 April 2019, has amended the Companies (Acceptance of Deposits) Rules, 2014. This amendment is in relation to its earlier notification dated 22 January 2019 which mandated the non-government companies to file Form DPT 3 providing particulars of transactions that have not been considered as deposit under the Companies Act 2013 or both as on 22 January 2019. With this amendment, the MCA has amended to mandate the Companies to provide aforesaid information as on 31 March 2019. Further, it has extended the due date for filing Form DPT 3 from 22 April 2019 to 30 June 2019.

Source: http://www.mca.gov.in/Ministry/pdf/CompaniesAcceptanceDepositsSecAmendRules_01052019.pdf

SEBI Guidelines to determine allotment and trading lot size for Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs)

The Securities and Exchange Board of India (SEBI) recently amended the SEBI (Infrastructure Investment Trusts) Regulations, 2014 (“InvIT Regulations”) and SEBI (Real Estate Investment Trusts) Regulations, 2014 (“REIT Regulations”) vide notification dated 22 April, 2019.

With the amended regulations notified, the minimum subscription requirement has been reduced and the trading lot in terms of number of units have been defined for publicly offered InvITs and REITs. Also, limits for aggregate consolidated borrowings and deferred payments, net of cash and cash equivalents, have been increased to seventy percent of the value of the InvIT assets.

Further, the said amendments have also laid down the manner of determining the minimum allotment requirement for publicly offered InvITs and REITs. Following are the guidelines:

  1. For Initial Offer:
    1. Each allotment value shall not be less than Rs. 1,00,000/- for InvITs and Rs. 50,000/- for REITs, where such lot consists of 100 units.
    2. Allotment to any investor shall be made in the multiples of a lot.
  2. For Follow-on offer:
    1. The minimum allotment shall be of such number of lots as it had at the time of the initial offer and the value shall not be less than Rs. 1,00,000/- for InvITs and Rs. 50,000/- for REITs. Also, each lot shall consist of such number of units in its trading lot as it had at the time of the initial offer.
    2. Allotment to any investor shall be made in the multiples of a lot.

With respect to the publicly offered InvITs and REITs whose units are listed on the date of this notification i.e., 22 April, 2019, the recognized Stock Exchanges in conference with such InvITs and REITs, determine the number of units in the trading lot within 22 October, 2019.

Additional Financial Disclosure for InvITs:

As per regulation 20(3)(b) of the InvIT Regulations, the InvITs who have their aggregate consolidated borrowings and deferred payments above 49 percent shall disclose the following items additionally to financial disclosures (As stipulated by circular CIR/IMD/DF/127/2016 dated November 29, 2016):

  1. Asset cover available;
  2. debt-equity ratio;
  3. debt service coverage ratio;
  4. interest service coverage ratio;
  5. net worth;

The aforesaid amendments are aimed at providing flexibility to the issuers in terms of fundraising and increasing the access of these investment vehicles to investors.

Source: https://www.sebi.gov.in/web/?file=https://www.sebi.gov.in/sebi_data/attachdocs/apr-2019/1556017751762.pdf#page=1&zoom=auto,-16,800

Draft Enabling Framework for Regulatory Sandbox

In July 2016 the Reserve Bank of India (RBI) had setup an inter-regulatory Working Group to look into and report on various aspects relating to fintech. One of the key recommendations of the Working Group was the introduction of an appropriate framework for a regulatory sandbox. Thus on 24th April 2019, the RBI has come out with a Draft Enabling Framework for Regulatory Sandbox (“Draft Framework”).

Before we proceed with the details regarding the Draft Framework it is important to understand the concept of a regulatory sandbox.  Regulatory sandbox (RS) refers to live testing of new products or services in a controlled/ tested regulatory environment for which the regulators may permit certain relaxation in the regulations only for the limited purpose of testing. The RS allows the entities to test their product in a controlled environment before a wider-scale launch. Thus the RS at its core is a formal regulatory programme for market participants to test new products, services, business models with customers in a live environment subject to certain safeguards and oversights.  Further, RBI in its Working Group Paper also discussed the concept of an ‘innovation hub’ which provides support, advice or guidance to regulated or unregulated firms in navigating the regulatory framework or identifying the legal issues.

Eligibility criteria of an applicant

The Draft Framework lays down the eligibility criteria for participating in the RS. The target applicants for entry in the RS are fintech firms which meet the prescribed conditions of a start-up by the Government. The focus of the RS is to encourage innovation where (a) there is an absence of regulations, (b) there is a need to temporarily ease the regulations for the proposed innovation, and (c) the proposed innovation shows promise of easing the delivery of financial services.

The RS shall begin the testing process with 10-12 selected entities through a comprehensive selection process which has been detailed under the ‘Fit and Proper criteria for selection of participants in the RS’. The entities should satisfy the following conditions: (a)  the entity should be a company incorporated and registered in India and should be “Start up” , (b) the entity should have a minimum net worth of Rs 50 lakhs as per its latest audited balance sheet, (c) the promoters/ directors of the entity should be fit and proper and a declaration should be made to that effect, (d) the conduct of the bank accounts as well as the entity’s promoters/directors should be satisfactory, (e) a satisfactory CIBIL or equivalent credit score of the promoters/directors of the entity is required, (f) applicant should showcase that their product/services and ready for deployment in the broader market, (g) entity should demonstrate arrangements to ensure compliance with regulations on consumer data protection and privacy, and (h) the entity should have adequate safeguards related to the IT system to ensure safety of data and records.

The fintech solution proposed by the applicant should highlight the existing gap in the financial system and demonstrate that there is a regulatory barrier that prevents the deployment of the product/service. Additionally, the applicant should clearly define the test scenarios and the expected outcomes from the sandbox experimentation and an acceptable exit and transition strategy in case the fintech driven solutions are discontinued or deployed on a broader scale after exiting the RS. To this effect, the applicant is required to share the result of the proof of concept/ testing of use cases including any relevant prior experiences before getting admission into RS for testing.

Design features of the RS

The RS may run a few cohorts i.e. end-to-end sandbox process, with a limited number of entities in each cohort testing their products in a stipulated time. The RS shall be based on different subjects focusing on areas such as financial inclusion, payments, digital KYC, etc. Though these cohorts may run for varying time period but it should ordinarily be completed within 6 months.

The innovative products/services which could be considered for testing under RS would include retail payments, money transfer services, market places lending, digital KYC, financial advisory services, smart contract, cybersecurity products, etc. On the other hand, the innovative technology which could be considered for testing under RS would include data analytics, API services, applications using block chain, AI and machine learning applications and mobile technology applications.

Regulatory requirements for RS applicant and exclusions from RS

The regulatory requirements which shall be mandatorily adhered to by the applicant are: (a) customer privacy and data protection, (b) security of transactions, (c) KYC/ AML/ CFT requirements, (d) secure storage of and access to payment data of stakeholders, and (e) statutory requirements.

However, an entity would not be suitable for RS if the proposed financial service is similar to a product/service/technology which already is being offered in India unless the applicant can show that either a different technology is gainfully applied or the same technology is being used in a more effective and efficient manner. Accordingly, the Draft Regulations have put together an indicative negative list of products/ services/ technology which may not be accepted for testing. The list includes businesses related to credit registries, credit information, crypto-currency, initial coin offerings and chain marketing services.

Extending or Exiting the RS

In case the sandbox entity requires an extension of the sandbox period it shall apply to the RBI within one (1) month before the expiration of the sandbox period. Further, RBI at its discretion can discontinue the RS testing for an entity if it does not achieve the intended purpose or if the entity is unable to comply with the relevant regulatory requirements.  The sandbox entity may exit from the RS on its own by informing the RBI one week in advance.

Boundary conditions, transparency, and consumer protection

A sandbox must have a well-defined space and duration for the proposed financial services to be launched and the boundary conditions for the RS shall include the start and end date of RS, target customer type, limit the number of customers involved, transaction ceiling, and cap on customer. Further, the RBI shall communicate the entire RS process including the launch, theme of the cohort, entry and exit criteria on its website to ensure transparency. And as stated earlier before discontinuing/ exiting from the RS, the sandbox entity shall ensure that it meets all the existing obligations towards its customers and entering into an RS does not limit the liability of the entity towards its customers.

Sandbox process and stages

The end to end sandbox process, including the test of the products/ services shall be overseen by the FinTech Unit (FTU) at RBI, and the stages involved in the RS are as follows:

  • Stage 1: Preliminary Screening (4 weeks) – FTU shall ensure that the applicant clearly understands the objectives and principles of the RS, and it is in this phase the application received by the FTU are evaluated and shortlisted who meet the eligibility criteria.
  • Stage 2: Testing Design (3 weeks) – In this phase which lasts for 3 weeks the FTU finalizes the test design through an iterative engagement with the applicant and shall identify the outcome metrics for evaluating the evidence of risk or benefits.
  • Stage 3: Application Assessment (3weeks) – In this phase the FTU vets the test design and proposes regulatory modifications if any.
  • Stage 4: Testing (12 weeks) – The testing may last for a maximum tenure for 12 weeks. In this phase, the FTU generates empirical evidence to assess the test conducted.
  • Stage 5: Evaluation (4 weeks) – The final evaluation of the outcome of testing the products/ services/ technology is confirmed in this phase by RBI. The FTU shall assess the outcome report and decide whether the product/service is viable and acceptable under RS.  

Statutory and legal issues

If the applicant is allowed by the FTU into the RS, the entity would be provided by appropriate regulatory support by RBI in the form of relaxation of specific regulatory requirements during the duration of the RS. However, RBI shall not bear any liability arising from the RS process and any liability arising from the experiment has to be borne by the entity alone. Further, the sandbox entity should ensure that on exiting from the RS or on the completion of the RS process, the sandbox entity should fully comply with all the relevant regulatory requirements.

Source:

1.https://m.rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=920#A_2

2.Report of the Working Group on FinTech and Digital Banking- https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=892

Extension of due date for filing ACTIVE form

On 21 February 2019, the Ministry of Corporate Affairs (the MCA) had mandated all companies incorporated prior to 31 December 2017, to file Active Company Tagging Identities and Verification (Form INC 22A Active) on or before 25 April 2019. However, after considering the representation received various stakeholders, the MCA vide its Notification dated 25 April 2019, has extended the due date for filing the Form INC 22A Active till 15 June 2019.

Source:http://www.mca.gov.in/Ministry/pdf/CompaniesIncorporationFourthAmendmentRules_25042019.pdf

Amendment to Regulations on Institutional Trading Platform- Innovation Growth Platform 1.0

Background

In the year 2016, Securities Exchange Board of India (SEBI) had introduced Institutional Trading Platform vide amendment to the SEBI Regulations (Issue of Capital and Disclosure Requirements), 2009 (SEBI ICDR Regulation) to facilitate listing of start-ups in sectors like e-commerce, data analytics and bio-technology to raise funds and get their shares traded on stock exchanges. However, due to strict norms and inability to access the platform, this initiative was not effective. In the wake to kick start listing of securities by the start-ups, with effect from 5 April 2019, SEBI further amended the SEBI ICDR Regulation (Amendment Regulation). The Amendment Regulation is notified to bring change in the start-up ecosystem by making the platform more accessible and more attractive for the new age ventures.

Key Changes

SEBI has tweaked the existing listing norms of the Institutional Trading Platform and has made the following changes:

Particulars Old Provision Amended Provision
Change of name Earlier it was known as Institutional Trading Platform (ITP) The platform has been renamed as ‘Innovators Growth Platform‘(IGP).
Eligible Issuers In addition to start-ups, any company having Qualified Institutional Buyers (QIBs) as their shareholders to the extent of at least 50% of pre-issue capital was eligible to list on the ITP. IGP has been designed to facilitate listing of the companies that provide products and services or business platforms in the areas of technology, information technology, intellectual property, data analytics, bio-technology or nano-technology are eligible to list on the IGP.
Shareholding Requirement At least 25% of the pre-issue capital to be held by QIBs. Listing can be done by way of IPO or even without an IPO process.

(a)   IPO Process: At least 25% of the pre-issue capital (for at least 2 years) to be held by either: (a) QIBs; (b) a pooled investment fund with minimum assets under management of USD 150 million (subject to meeting other prescribed criteria for such pooled investment fund); (c) accredited investors (not more than 10%); (d) Cat III FPI; or (e) family trusts with net-worth of more than INR 500 Crores.

(b)   Without IPO process: no such minimum offer to the public is required.

Post-issue shareholding Earlier, there was a requirement that no person, individually or collectively with other persons acting in concert, to hold 25% or more of the post-issue capital. This requirement has been done away with.
Minimum application size INR 10 lakh INR 2 lakh (this brings relaxations)
Allocation 75% to institutional investors 25% to non-institutional investors There is no minimum reservation requirement. Also, the allocation will be on proportionate basis to institutional and non-institutional investors.
Minimum number of allottees 200 50
Minimum trading lot INR 10 lakh INR 2 lakh

 

Conclusion

Though very less, off lately we have seen few tech companies like Tejas Networks, Koovs, Matrimony.com, etc. who have taken the IPO route to raise funds. Despite the vagaries of market, going public not only provide recognition but also shows that the start-up is beyond mortality. The Amendment Regulations have tried to simplify the listing norms and with this, SEBI intends to attract a greater number of investors on the IGP and aims to provide a much-needed boost to start-ups looking to access the capital markets.

Source:https://www.sebi.gov.in/legal/regulations/apr-2019/securities-and-exchange-board-of-india-issue-of-capital-and-disclosure-requirements-second-amendment-regulations-2019-_42644.html