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Determination of Significant/Ultimate Beneficial Ownership under the Indian Laws and Laws of other jurisdictions

The global scenario was riddled with the issue of money laundering, bribery, corruption, insider trading, tax fraud, terrorist financing and other illegal activities. These global issues were suggested to be combated by the Financial Action Task Force (FATF), an inter-governmental body established in 1989. The FATF was set up with the objective to lay down standards and promulgate efficient execution of legal, operational and regulatory measures for combating these.

The Guidance on Transparency and Beneficial Ownership released in October 2014 (which can be accessed at http://www.fatf-gafi.org/media/fatf/documents/reports/Guidance-transparency-beneficial-ownership.pdf) (“Recommendations”), noted that corporate entities such as companies, trusts, foundations, partnerships and other types of legal persons and arrangements enter into an array of activities, both entrepreneurial and commercial in nature. The Recommendations note that these entities have been misused on more than one instance in various money laundering, bribery, corruption, insider trading, tax fraud, terrorist financing and other illegal activities. An exposure of some of these activities became widely known as “The Panama Papers”. These entities made it easier to convert and camouflage the income received from these activities as a part of the revenue stream of the corporate entities and the FATF operates to unmask this camouflage and promote transparency.

The Ministry of Corporate Affairs (MCA) notified the provisions surrounding disclosure of Significant Beneficial Ownership on 6 June 2018. In addition to notifying the provisions under the Companies Act, 2013 (Act), the MCA notified the Companies (Significant Beneficial Owners) Rules, 2018 (“Rules”) on June 13, 2018. Section 90 of the Act read with the Companies (Significant Beneficial Owner) Rules, 2018 are notified with an intent to ensure adequate, accurate and timely information on the beneficial ownership of companies to the regulatory authorities and to identify and verify the identity of the individuals who ultimately own and control a corporate entity.

Legal Framework under Indian Laws

Framework under the Companies Act

The intent of Section 90 of the Companies Act, is to determine the identity of the person behind the curtain who is having a significant ownership of the company and is essentially controlling the management and daily affairs of the company. (For a more detailed reading regarding the applicable rules and the intricate nuances, please refer to our earlier post, which can be accessed here.  

Reading of the Act and the Rules together, every person who, while acting alone or together or through one or more persons or through a trust, hold beneficial interest of not less than 10% of the shares in the company with the names of such owners not being entered in the register of members of the company as the holder of such shares would qualify as significant beneficial owners and are required to make a declaration to the company in which significant beneficial ownership is held. The declaration should specify the nature of beneficial interest by way of Form No. BEN-1. The Company is under an obligation to make a filing of Form No. BEN-2 on receipt of the declaration received by the significant beneficial owner within 30 (thirty) days of receipt of the declaration. The Company is under an additional obligation to maintain a register of significant beneficial owners and keep them open for inspection by shareholders of the Company. The availability of register for inspection is in line with the original intent of promoting transparency regarding the structure of companies. The onus of disclosure regarding significant beneficial ownership has been laid primarily on natural persons holding, either directly or indirectly, independent of their domicile or residential status. The company can serve a notice seeking information under Form BEN-4. The person on whom the notice has been served is required to revert to the company within 30 days of receipt of notice. Wherein the company is not satisfied with information provided or person fails to furnish required information, is entitled to apply to the Tribunal within 15 days of expiry of the period mentioned in the notice.

Framework under other Indian legislations

The identification and reporting of significant beneficial ownership is an issue that has been earlier dealt with under other legislations as well before the Act and Rules. The various legislations that it has been dealt with under earlier are:

Prevention of Money Laundering Act, 2002 (PMLA): The PMLA puts an onus on the banks, financial institutions and intermediaries for the identification of beneficial owners of their clients. The PMLA defines a beneficial owner as “an individual who ultimately owns or controls a client of a reporting entity or the person on whose behalf a transaction is being conducted and includes a person who exercises ultimate effective control over a juridical person.”

SEBI Guidelines: The concept of beneficial ownership has been dealt under the SEBI guidelines by way of Master Circulars release by SEBI which are:

a. SEBI Master Circular No. CIR/ISD/AML/3/2010 dated December 31, 2010: This Master Circular puts a mandatory onus on all registered intermediaries to obtain all information about their clients and additionally are required to identify and verify the identity of persons who beneficially own or control the securities account as part of their Client Due Diligence policy.

b. SEBI Master Circular No. CIR/MIRSD/16/2011 dated August 22, 2011 and MIRSD/SE/Cir21/2011 dated October 5, 2011: This Master Circular mandates the identification of beneficial owners by way of Prescribed uniform Know Your Client (KYC) requirements for the securities markets.

c. SEBI Master Circular No. CIR/MIRSD/2/2013 dated January 24, 2013: This Master Circular provides uniform guidelines on identification of BO, based on Government of India’s consultation with regulator.

RBI Master Direction on KYC, 2016 (Master Direction) and Rule 9 of the PML (Maintenance of Records) Rules, 2005: The Master Direction defines a beneficial owner as “a natural person(s), who, whether acting alone or together, or through one or more juridical person, has/have a controlling ownership interest or who exercise control through other means”. The Master Direction defines controlling ownership interest as ownership of/entitlement to more than 25 per cent of the shares or capital or profits of the company and control as the right to appoint majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements.

Legal framework under other jurisdictions[1]

Jurisdiction Term used Governing legislation Definition
United Kingdom Person with significant control Companies Act, 2006[1] Designated ‘person with significant control’ (PSC) defined as individual who holds directly or indirectly more than 25% of shares/voting rights in company; has right to appoint or remove majority of board of directors; or has right to exercise/actually exercises significant influence or control over company/trust/ firm.
United States of America Beneficial Owner FinCEN’s Beneficial

Ownership Rules[2]

Any individual who, directly or indirectly, owns 25 percent or more of the legal entity customer; and One individual who has “significant responsibility to control, manage, or direct the legal entity.
Brazil Final beneficiary The Brazilian Federal

Revenue’s Normative

Instruction[3]

An individual that holds control or significantly influences the legal person to be registered, which occurs when the individual (i) holds, directly or indirectly, percentage superior to 25% of the corporate capital of such person or (ii) holds or exercises great influence, directly or indirectly, on the corporate deliberations and has the power to appoint the majority of the managers of the legal entity, even without controlling it.
European Union Beneficial Owner European Commissions

Anti-Money Laundering

Directive[4]

Any natural person who ultimately owns or controls customer, and/or natural person on whose behalf transaction or activity is conducted.

[1] Section 790C read with Schedule 1A of the Companies Act, 2006

[2] Section 1010.230(d), FinCEN’s Beneficial Ownership Rules

[3] Article 8, The Brazilian Federal Revenue’s Normative Instruction 1634

[4] Paragraph 13, Directive (EU) 2015/849 of the European Parliament and of the Council, 20 May 2015

Key Differences between Indian and legislations from other jurisdictions

Key Points of Legislations under other jurisdictions Indian Legislation Differences
United Kingdom i.    Individual who holds directly or indirectly more than 25% (twenty-five) of shares/ voting rights in company;

ii.   has right to appoint or remove majority of board of directors; or

iii.  has right to exercise/ actually exercises significant influence or control over company/ trust/ firm.

i.    the natural person who holds 10% (ten) of the share capital of the Company;

ii.   who exercises significant influence;

iii.  control through other means

The provisions in UK and India differs in:

i.    the threshold of the shareholding percentage.

ii.   An additional qualification regarding the right to appoint or remove majority of board of directors in the UK legislation.

United States of America i.    Individual who, directly or indirectly, owns 25 percent or more of the legal entity customer; and

ii.   One individual who has “significant responsibility to control, manage, or direct the legal entity.

The point of difference between the US and Indian provisions is the threshold of the share holding percentage.
Brazil Individual that holds control or significantly influences the legal person to be registered, which occurs when the individual:

i.    holds, directly or indirectly, percentage superior to 25% of the corporate capital of such person or

ii.   holds or exercises great influence, directly or indirectly, on the corporate deliberations and has the power to appoint the majority of the managers of the legal entity, even without controlling it.

The points of difference between the Brazil and Indian provisions are:

i.    the threshold of the share-holding percentage.

ii.   The Indian provision lays an emphasis on the concept of control whereas in the Brazilian provision, a person may be deemed as a final beneficiary if influence is exercised even without there being the presence of control.

European Union Any natural person who ultimately owns or controls customer, and/or natural person on whose behalf transaction or activity is conducted.

The key point of difference between the EU provision and the Indian provision is that where a prescribed threshold has been provided under the Indian law, the EU legislation lacks one. The EU lays an emphasis on who the ultimate owner behind the corporate veil is without prescribing a minimum threshold as a qualification.

From the comparison elucidated above, it can be seen that the threshold for determination of significant beneficial ownership is more stringent in India as compared to the legislations of other jurisdictions. The lower threshold increases the scrutiny of ultimate ownership. It would help if there is clarity on “exercising control through other means” constitute.

Author: Mr. Spandan Saxena

 

[1] Disclaimer: It is recommended that the reader refer the laws of the analyzed jurisdictions and consult a person who is an expert in the following jurisdictions. The aforementioned jurisdictions have merely been used for an analytical purpose and do not constitute a legal opinion in any manner whatsoever.

[2] Section 790C read with Schedule 1A of the Companies Act, 2006

[3] Section 1010.230(d), FinCEN’s Beneficial Ownership Rules

[4] Article 8, The Brazilian Federal Revenue’s Normative Instruction 1634

[5] Paragraph 13, Directive (EU) 2015/849 of the European Parliament and of the Council, 20 May 2015

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Significant Beneficial Ownership: Who is the real owner of the shares?

The recent changes to Section 90 of Companies Act, 2013, is to determine the identity of the person behind the curtain who is having a significant ownership of the company and is essentially controlling the management and daily affairs of the company. The Ministry of Corporate Affairs notified the Companies (Significant Beneficial Owners) Rules, 2018 (“Rules”) on 13 June 2018. These Rules were made in exercise of powers provided under Section 90 of the Companies Act, 2013 (Act) which was notified on 6 June 2018.

At present, there are two separate definitions for the determination of a significant beneficial owner. The first, as per Section 90 of the Act, an individual who holds at least 25 (twenty-five) percent of beneficial interest in the company would be categorised as a significant beneficial owner. Such individual can hold beneficial interest either alone or together or through one or more persons, with such person or persons including person resident outside India, or a trust, with such trust including a trust outside India.

The second definition of significant beneficial ownership has been provided under the Rule 2(e) of the Rules, which ascribes the categorisation of a significant beneficial owner to an individual. However, a major deviation under the Rules from Section 90(1) is that the threshold provided for an individual being classified as a significant beneficial owner is 10 (ten) percent in contrast to the threshold of 25 (twenty-five) percent prescribed under the Act. Moreover, the definition as per the Rules provide for an additional condition that the name of such individual who is holding beneficial interest should not be entered in the register of members.

Both definitions have deemed a necessary condition that an individual must be holding beneficial interest in the company to be deemed as a significant beneficial owner. The term beneficial interest has been defined under Section 89(10) as the right of entitlement of a person alone or together with any other person, indirectly or directly, through any contract or arrangement, to exercise any or all rights attached to the shares; or to receive or participate in any dividend or any such distribution in respect to shares held.

Despite the contradiction in the threshold for determination of significant beneficial ownership in a company, the threshold specified in the Rules would be considered as the applicable threshold. This is because Section 90 of the Act provides that the beneficial interest should not be less than 25 (twenty-five) percent or any other percentage as may be prescribed. Therefore, the threshold of 10 (ten) percent as prescribed under the Rules would be the final threshold percentage to determine significant beneficial ownership.

The application of the Rules extends to companies which has shareholders apart from individuals and natural persons with such shareholders holding beneficial interest in the company as per prescribed limits. The application of these rules however, does not extend to holding of shares in instances of pooled investment vehicles or investment funds such as AIFs (Alternative Investment Funds), Real Estate Investment Trusts, Mutual Funds, Infrastructure Investment Trusts.

The Rules elucidate that a beneficial interest would include right of entitlement held either alone or jointly with another person, be it directly or indirectly under any contract or arrangement. The right of entitlement would include the right to exercise any or all rights attached to such shares and receive or participate in any dividend or other distribution. Beneficial owners would be such persons holding a beneficial interest.

The rules deem significant beneficial owners to be such individuals, who while acting alone or together or through one or more persons or through a trust, hold beneficial interest of not less than 10% of the shares in the company with the names of such owners not being entered in the register of members of the company as the holder of such shares.

In cases where the beneficial interest is possessed by persons other than individuals or natural persons, the significant beneficial ownership would be determined as follows:

  1. Where the member is a company – the significant beneficial owner would be the natural person who holds 10 (ten) percent of the share capital of the Company or who exercises significant influence or control in the company through other means.
  2. Where the member is a partnership firm – the significant beneficial owner would be the natural person who holds 10 (ten) percent of the share capital or has entitlement of not less than 10 (ten) percent of profits of the partnership.
  3. Where no natural person can be identified – where no natural person is identifiable for a company or a partnership firm, the senior management official of the entity would be deemed as the significant beneficial owner.
  4. Where the member is a trust through a trustee – for the purpose of identifying the significant beneficial owner, the process would include identification of the author of the trust, trustee, the beneficiaries with not less than ten per cent. interest in the trust and any other natural person exercising ultimate effective control over the trust through a chain of control or ownership.

The Rules explicitly exempt the applicability of certain funds and investment vehicles that are registered under the SEBI Act. The Rules however, do not deal with the funds that are foreign based and not registered under the SEBI Act. Therefore, if an Indian company has a foreign fund as an investor and has an ownership qualifying under the definition of a significant beneficial owner, it is not clear whether such foreign fund would be required to make a declaration.

The filing compliance under the rules are as follows:

  1. A declaration is required to be filed to the company in which significant beneficial ownership is held within 90 days of commencement of the rules and in case of any change in the significant beneficial ownership, declaration is to be made to the company within 30 days of such change under Form BEN-1.
  2. The company is required to file Form BEN-2 with respect to such declaration within 30 days of receipt of declaration under Form BEN-1.
  3. A company is required to maintain a register of significant beneficial owners under Form BEN-3.
  4. The company can serve a notice seeking information under Form BEN-4. The person on whom the notice has been served is required to revert to the company within 30 days of receipt of notice. Wherein the company is not satisfied with information provided or person fails to furnish required information, is entitled to apply to the Tribunal within 15 days of expiry of the period mentioned in the notice.

As per the Rules, the companies were required to make a filing of Form BEN-2 on receipt of Form BEN-1 within 30 days. However, the Ministry of Corporate Affairs (MCA) be way of a general circular no. 07/2018 dated 6 September 2018 have clarified that the 30-day time limit for filing Form BEN-2 would commence from the date of the e-form being available on the MCA-21 portal rather than with 30 days of receipt of declaration by the company under Form BEN-1. The MCA further clarified that no additional fee would be applicable subject to the case that the company makes the filing of Form BEN-2 within 30 days of the form being available on the MCA-21 portal.

Source: http://www.mca.gov.in/Ministry/pdf/CompaniesSignificantBeneficial1306_14062018.pdf

http://www.mca.gov.in/Ministry/pdf/GCCircularBen_10092018.pdf

Jurisprudence of Corporate Criminal Liability of Directors

Gone are the times when the world viewed Indian Companies as ‘family businesses’. With time, the structures adopted in Indian companies have grown increasingly specialized and complex, with specific directors being nominated to take charge of specified activities of the Company. As we will see, the provisions for making the direction and management of a company liable are mostly deeming provisions. However, there can be an opinion amongst stakeholders while dividing duties amongst the board members that in case criminal liability arises against the company then the director nominated for overlooking that aspect of its business shall also be held criminally liable. The legal approach, though, is a little more complex than that.

This article is a disambiguation in this regard, and through the following paragraphs an understanding of the theoretical framework, the legislative intent and the judicial interpretations in developing the standards to impose criminal liability on directors will be discussed. As companies have grown with time, so have statutory provisions and the understanding with respect to corporate actions which amount to criminal offences, and who is deemed liable for it.

Laying the Theoretical Framework: Corporate Criminal Liability

The recognition of the company as a separate legal entity is the basic cornerstone of laws relating to corporate liability around the world. However, courts struggled in attempting to fasten liability over companies for acts which were considered criminal offences. The courts had historically struggled on two main fronts in this regard (1) to assign mens rea, i.e. a criminal intent factor to fictional entities such as companies, and (2) to punish corporates where statutory punishments were mostly corporal in nature, i.e. requiring punishment via imprisonment.

On the face of this need, emerged the doctrine of corporate criminal liability, which basically enables the courts to single out individuals responsible for criminal acts committed in the name of companies. For offences which did not require the proof of mens rea, the simple answer that courts came up with was to introduce a modified version of the Doctrine of Vicarious Liability through which the controlling persons of the company would be made liable[i]. But soon company directors were also brought to answer for the criminal acts for which criminal intent was also necessary to be proven[ii]. This was called the theory of ‘Identification’ or ‘Attribution’, a modified form of vicarious liability, where for the purpose of the criminal act, the person in control of the affairs of the company (that is to say its directors and managers) and the company were considered one and the same.

Earlier, the courts in India only recognized that companies can act through their managers and directors, but the law as it stands now however, consolidates the position that companies are as culpable as any living person and can be prosecuted and punished for the same, this is governed by two major decisions in this regard. First is the case of Standard Chartered Bank v. Directorate of Enforcement[iii] wherein the constitution bench of the Supreme Court held that a company can be prosecuted and convicted for an offence requiring minimum imprisonment. And secondly, in Iridium India Telecom Ltd. v. Motorola Inc[iv], wherein the issue was whether a company could be held liable under Section 420 of the Indian Penal Code, 1860, the Apex Court answered in the affirmative and clarified further, that even if the offence would require the proof of mens rea, a company can be made liable to the act as the guilty mind of the person in control of the company’s affairs is ‘attributed’ to the company as well.

Director’s Liability under India’s Legislative Framework

The Companies Act, 1956 employed the concept of “officer who is in default”, to impose the liability for defaults by a company over officers responsible for its management. However, penalties under the Companies Act, 1956 were seen as largely ineffective against cases of serious internal frauds committed by the promoters and senior management of companies. But, with the enactment of the Companies Act, 2013 ( the “Act”), came also the statutory recognition of the duties of a director, such as exercise of due and reasonable care, skill, diligence, and independent judgement.  Earlier, by virtue of their positions, only the MD, whole-time directors, and company secretaries used to fall within the scope of “officer who is in default”, but the Act has significantly expanded this scope to include any person who would, in the given scenario, have had superintendence/ control/ direction/ management over the affairs of the company. Under the Act, independent directors can also be made answerable for lapses in performing their duties. The Act also includes the elements of knowledge and intent in determining who is an officer who is in default. Moreover, section 447 of the Act, which deals with fraud, makes persons liable who act or abuse their position with intent to deceive, to gain undue advantage, or to injure the legitimate interests of others (company/ shareholders/ creditor/ persons) whether or not there is wrongful gain or loss. Nevertheless, it is necessary to prove intent and knowledge in most cases.

Apart from the Companies Act, 2013, offences by companies are also stipulated under various other legislations. These provisions extend the liability for contravening the provisions under the relevant statute to companies, and the persons in charge of and responsible for the conduct of the business of the company. Further, these provisions typically provide for a non-obstante clause which stipulates that if it is proved that the director, manager, secretary or other officer of the company connived, consented to the offence or can be attributed to the negligence, then such director, manager, secretary or other officer shall also be deemed guilty and proceeded and punished accordingly.

Some of the legislations that contain the above-mentioned provision would be as follows:-

  • the Air (Prevention and Control of Pollution) Act, 1981;
  • the Water (Prevention & Control of Pollution) Act, 1974;
  • the Prevention of Money Laundering Act, 2002;
  • the Securities Contracts (Regulation) Act, 1956;
  • the Securities Exchange Board of India Act, 1992;
  • the Competition Act, 2002; and
  • the Income Tax Act, 1961.

The question that arises basis the above discussion, then, is whether any person simply designated as an officer in default by the Company, can be held criminally liable.

In Sunil Bharti Mittal v. Central Bureau of Intelligence[v] the Supreme Court gave recognition to the theory of attribution/ identification in determining whether a director or person in charge of the company can be prosecuted for an offence by the company. The court stated that the person upon whom the acts of the company must be attributed must be the ‘alter-ego’ of the company, that is the degree of identity between the acts of the company and the ‘directing mind and will’ of the responsible persons must be high enough for the courts to infer them as one and the same. Moreover, just because a person is at the helm of the affairs, that would not make him/her liable for crimes requiring intent. In this case, the Supreme Court held that the special court was right to not accept charge sheet against the managing director just because he was the head of the company.

The discerning criteria thus is whether the proof of intent is required to prove an offence. An officer who is in default for contraventions which do not require proof of intent, may, thus, be prosecuted by virtue of his/her position, but the same is simply not tenable in offences where proof of intent is required.

An example of a statute which allows the nomination of person-in-charge for the obligations under a legislation is under section 66 of the Food Safety and Standards Act, 2006,. The provision in this enactment state that a director or manager can be nominated to be responsible for any contraventions of the provisions of the respective enactments.

It is to be noted, that only when the legislation permits the nomination of the responsible director, and such nomination is made before the commission of the offence, only then a director specifically nominated for offences under an act can be prosecuted, even if there is no direct intent[vi].

Hence,

The thumb rule is thus that unless it is specifically provided in a statute, a director may be made criminally liable only if there is existing proof of intent against the director. The directors must ensure that they diligently avoid the commission of such offences in the name of the Company, the onus shall nevertheless remain upon them to prove that the offence was committed without their knowledge or consent[vii].

The laws are changing in their focus from structural to functional aspects of the companies in determining criminal liability, for example, the 2018 amendment to the Prevention of Corruption Act, 1988 brings forth a stricter provision for liability of any director/manager/other officer who “acted in consent or connivance” with the commercial organization (which includes a company) in the commission of an offense under the legislation. The position of the officer in the company would thus be less important to fasten the liability, and whether the company had standards/code of conducts in place to demand the level of diligence and care from its officers in preventing the offence from being committed will also be a factor under the Prevention of Corruption Act, 1988.

It is now more important than ever that companies must actively develop standards of accountability from each level of key people responsible within the organisation and adopt procedures which prevent such conduct in the first place.

[i] Queen v. Great North of England Railways Co., [1846] 9 QB 315; State v. Morris & Essex Rail Co., 23 N.J.L. 360 (1852); Commonwealth v. Proprietors of New Bedford Bridge, 68 Mass (2 Gray) 339 (1854)

[ii] New York Central and Hudson River Rail Road Co. v. United States, 212 US 431 (1909); Moussell Brothers Ltd. v. London & North West Railway Co Ltd, [1917] 2 KB 836; Lennard’s Carrying Co Ltd v. Asiatic Petroleum Co Ltd, [1915] AC 705

[iii] AIR 2005 SC 2622

[iv] (2011) 1 SCC 74

[v] AIR 2015 SC 923

[vi] R. Banerjee v. H.D. Dubey, MANU/SC/0731/1992

[vii] Ministry of Agriculture v. Mayhco Monsanto Biotech (India) Limited, (2016) 137 SCL 373 [CCI]

Author: Avaneesh Satyang

 

Regulatory Update: Companies Act, 2013 for KYC of Directors

The Ministry of Corporate Affairs (the MCA) vide its notification dated 5 July 2018, has notified the Companies (Appointment and Qualification of Directors) fourth Amendment Rules, 2018 which shall come into force with effect from 10 July 2018.

The MCA shall be updating its registry and conducting KYC of all Directors through a new e-form DIR-3 KYC. As immediate step, the e-form DIR-3 KYC shall have to be compulsorily filed on or before 31 August 2018 by:

  • Every Director (whether Indian or Foreign) who has been allotted Director Identification Number (DIN) on or before 31 March 2018 and whose DIN is in ‘Approved’
  • Every person having DIN irrespective of whether he holds any Directorship.
  • All disqualified Directors.

Going further, every individual who has been allotted DIN as on 31st March of a respective financial year shall have to file the e-form on or before 30th April of the following financial year.

Filing Fees for e-form DIR-3-KYC (as per the Companies (Registration Office and Fees) Third Amendment Rules 2018) which shall come into effect from 10th July, 2018):

Due dates Filing Fees
i)         Fees payable till 31st August, 2018 for DIR-3-KYC for current financial year (2018-19) Nil
ii)       Fees payable on or after 1st September, 2018 for current financial year (2018-19) Rs. 5000
iii)      Fees payable till 30th April of every financial year (i.e. from FY 2019-2020 onwards) for DIR-3-KYC as at 31st March of immediate preceding financial year Nil
iv)     Fees Payable in delayed cases Rs. 5000

The MCA will mark all approved DINs as ‘Deactivated’ if the e-form is not filed within the aforementioned due dates citing reason as ‘Non-filing of DIR-3 KYC’. The deactivated DIN shall only be activated after the e-form DIR-3-KYC has been filed with MCA with the additional fees.

Few important points to remember while filing the e-form:

  • Income Tax PAN, in case of Indian nationals and Passport, in case of Foreign Nationals is mandatory.
  • A Unique Personal Mobile Number and a Personal Email ID shall have to be mandatorily provided in the e-form and the same would be verified by a One Time Password (OTP).
  • The e-form should be filed by every Director using his own DSC. Thus, it is mandatory for every Director to have a valid DSC.
  • The e-form should be duly certified by a Practising Chartered Accountant or a Practising Company Secretary or a Practising Cost Accountant.

Immediate Action Plan:

  • Apply for DSC of all Directors (renewing expired DSCs as well as applying for fresh ones)
  • As attachments:
    1. Proof of Identity: PAN/Passport/Aadhar
    2. Proof of Address: Passport/Aadhar Card/Voter Identity Card/Driving License

MINISTRY OF CORPORATE AFFAIRS: NOTIFICATION OF COMPANIES (PROSPECTUS AND ALLOTMENT OF SECURITIES) AMENDMENT RULES 2018

The MCA vide its notification dated 7 May 2018 has amended Companies (Prospectus and Allotment of Securities) Rules 2014 and done away the requirement of detailed list of contents of the prospectus following suggestions from the stakeholders that offer documents are becoming too long, too detailed, and repetitive as also too difficult to understand.

Rule 3 of the Companies (Prospectus and Allotment of Securities) Rules 2014  relating to information to be stated in the prospectus, Rule 4of the Companies (Prospectus and Allotment of Securities) Rules 2014 relating to reports to be set out in the prospectus, Rule 5 of the Companies (Prospectus and Allotment of Securities) Rules 2014  relating to other matters and reports to be stated in the prospectus and Rule 6 of  the Companies (Prospectus and Allotment of Securities) Rules 2014 relating to period for which information to be provided in certain cases stands omitted.

Source:

http://www.mca.gov.in/Ministry/pdf/CompaniesProspectusRules_07052018.pdf

MINISTRY OF CORPORATE AFFAIRS: NOTIFICATION OF COMPANIES (APPOINTMENT AND QUALIFICATION OF DIRECTORS) SECOND AMENDMENT RULES 2018

The MCA vide its notification dated 7 May 2018 has amended Companies (Appointment and Qualification of Directors) Rules 2014 by Companies (Appointment and Qualification of Directors) Second Amendment Rules 2018 expanding the scope of qualifications of independent directors.

Rule 5 (2) requires that none of the relatives of an independent director is indebted to the company, its holdings, subsidiary or associate company or their promoters, or directors or has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, its holdings, subsidiary or associate company or their promoters, or directors of such holding company, for an amount of Rupees Fifty Lakhs at any time during the 2 immediately preceding financial years or during the current financial year.

Source:

http://www.mca.gov.in/Ministry/pdf/AppointmentDirectorsRules_07052018.pdf

Codification of Duties of Directors under the Companies Act 2013

Introduction

While the rights, powers, and duties of Directors defined in the Articles of Association of the Company, a need was felt for legal clarity. Under the Companies Act 1956 (the Erstwhile Act), there were no explicit provisions regulating the duties of the directors of the Company.  The J.J. Irani Committee report suggested that the duties of a Director should be “inclusive, and not exhaustive in view of the fact that no rule of universal application can be formulated as to the duties of the directors.”

On the basis of the JJ Irani committee report, a specific provision governing the duties of directors was included in the Companies Act, 2013 (the Act), which applies to directors both individually as well as collectively to the Board.  The section 166 of the Act has consolidated the law governing directors’ duties making it more certain. Although this consolidation is not exhaustive, as certain duties of directors are still enumerated under other sections of the Act, for instance, Section 184 of the Act obliges a director to disclose his interest in a contract with the company, nonetheless, director’s actions are benchmarked against responsibilities explicitly identified under section 166 which directors are expected to abide by, both individually and collectively as a Board.

General principles regarding duties of Directors:

A director of a company:

  1. shall, subject to the provisions of the Act, act in accordance with the articles of association of the company.
  2. should act in good faith in order to promote the objects of the company, for the benefit of its members as a whole, and in the best interest of the company, its employees, the shareholders, the community and for the protection of the environment;
  3. shall exercise his duties with due and reasonable care, skill and diligence; shall exercise independent judgment.
  4. shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.
  5. shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company.
  6. shall not assign his office and any assignment so made shall be void.

Classification of duties of directors

These duties can broadly be classified into two categories:

  1. Duty of care, skill and diligence & independent judgement:

The duty of care, skill and diligence require directors to devote the requisite time and attention to affairs of the company, pursue issues that may arise through “red flags” and make decisions that do not expose the company to unnecessary risks.

  1. Fiduciary duties:

Fiduciary duties, on the other hand, require the directors to put the interests of the company ahead of their own personal interests. The rules that prevent conflict of interest and self-dealing on the part of directors are integral to this set of duties.

Section 166 of the Act applies to directors of all types of companies. The aforementioned directors’ duties extend to all categories of directors, including independent directors. However, in addition to Section 166, independent directors have to comply with the Code of Conduct under Schedule IV of the Act.

The Act necessitates a holistic approach to decision-making at the Board level. Codification of directors’ duties forces directors into being more accountable and responsible towards the management of a company, thereby improving transparency and corporate governance standards.

Implications of the codification of directors’ duties:

  1. Use of discretion: Exercise of discretion by a director ought to be well-founded and based on a thorough examination of all relevant facts.
  2. Full disclosure: Directors are likely to expect full disclosure of relevant information for basing their decision.
  3. Impact on nominee directors: A significant impact of section 166 (2) will be on the relationship between a nominee director and his nominating shareholder. Considering the statutory requirement for a director to act in the best interests of the members as a whole and to exercise independent judgment while deciding on a matter, a nominee director may find it difficult to harmonise his statutory, duties under section 166 with such instructions of his nominating shareholder, which most of the times are inconsistent with the interests of the company or a class of shareholders.

Non-adherence to section 166 of the Act

Breach of section 166 is an offense punishable by a fine for an amount not less than rupees one lakh but which may extend to rupees five lakh. However, where a director is guilty of making an undue gain, he will also be liable to pay to the company an amount equal to the gain.

Clarity of directors’ duties may make it easier for shareholders to initiate a class action suit for a claim of damages against the company and/or its directors, if breach of directors’ duties results in the management or conduct of the affairs of the company being run prejudicial to the interests of the company or its shareholders.

Conclusion

Given the liability of directors for non-compliance with their statutory duties, the following measures may be considered by a company and its Board:

  1. The directors should be given a thorough briefing on the statutory duties. The level of the briefing will vary depending on a director’s familiarity with his duties but should be gradually subsumed into a company’s induction process for all directors.
  2. Directors should adopt a balanced approach to decision making, and not act as a ‘Dummy’ director.
  3. If required, the board of directors should seek professional advice to understand the implications of a particular decision for making an informed decision’ after considering all relevant factors.
  4. If the Board is of the view that there is a potential conflict between two provisions of Section 166. In such conflicting situations, perhaps it will also be appropriate for the Board to hear the views of each stakeholder and seek expert advice prior to deciding on a matter.
  5. Directors should attend as many Board meetings as possible so to ensure that they are fully briefed on developments affecting the company’s business.
  6. A Nominations Committee may be constituted which should evaluate applications for directorships on an objective basis while ensuring that any new Board member, particularly an independent director, has the requisite skills and experience required for that particular position.
  7. Directors should consider on a regular basis whether a particular contractual arrangement or role performed by them can reasonably be regarded as likely to give rise to a conflict of interest. If it can be so regarded, the director concerned ought to make appropriate disclosures to the Board, in accordance with the articles of association of the company or provisions of the Act.
  8. The Company Secretary responsible for preparing Board related documents should be made aware of the requirements of Section 166 so that the Board is given adequate information, including of opinion of experts that may be relevant for an informed decision-making process.

Author: Ms. Ifla.A is an associate at NovoJuris Legal.