Tag Archives: directors

Clarification on KYC updation for holders of Director Identification Number (DIN)

The Ministry of Corporate Affairs (the MCA) on 5 July 2018, had mandated to every Individual who has been allotted a Director Identification Number (DIN) as on 31 March of every year to file the Form DIR 3KYC on or before 30 April. In this regard, stakeholders were facing issues in filing the said Form DIR-3 KYC for the Financial Year 2019-20. The MCA issued a clarification in this regard stating that:

  1. DIN holders are required to file the DIR-3 KYC form every year.
  2. The e-form presently available on the portal does not cater for the filing form on an annual basis and filing in respect of DINs allotted post 31 March 2018.
  3. With the objective of making the form more user-friendly, the form is presently being modified to enable pre-filling of data & information.
  4. The revised form will be shortly available for filing and can be filed without any fee within 30 days from the deployment of the form.

Link: http://www.mca.gov.in/Ministry/pdf/DIR3KYCcompleteMessage_13042019.pdf

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Post-Merger Corporate Governance

Corporate governance is an important aspect for the success and growth of any organisation. A well-structured corporate governance regime becomes even more important post a merger (strategic or otherwise). It might prove to be especially beneficial in the smooth transition and functioning of the business of the merged entity, especially during the early stages after the merger. At the same time, a weak corporate governance structure may be detrimental to the success of the merged entity.

In a merger, the merging entities commonly come together to work and operate as a single merged entity. This would mean the integration of different cultures, mindsets, viewpoints, work ethics, principles, etc. Therefore, post-merger corporate governance becomes important so that all discussions between the key stakeholders of the merged entity are seamlessly documented leaving zero scope for potential conflict in the future. This would also help the key stakeholders to run the business of the merged entity without having to worry about internal conflicts, mismanagement, etc. Also, depending on the end goal or the objectives of the merging entities, there has to be a clear understanding on the type of merger to be undertaken. Refer to our previous post on M & A: Different structures and a comparative to know more about different structures of M&A.

What is Corporate Governance?

Before moving on to the different aspects of corporate governance to be considered post a merger, let us try to understand the meaning of the term ‘corporate governance’. With respect to early-stage unlisted entities, corporate governance generally refers to the internal rules and policies of the organisation, the relationship between the shareholders, the roles and responsibilities of the directors and the top management and the decision-making structure, including the financial and operational decision making. In a nutshell, it includes all aspects which govern the organisation and basis which business is conducted and an organisation is run, both with respect to internal stakeholders, as well as external stakeholders.

Significance of Post-Merger Corporate Governance

Merger of entities, more often than not, would mean the integration of different cultures, mindsets, viewpoints, work ethics, principles, etc. Even though the end goal would be the same, that is, the success and growth of the merged entity, perspectives on the means to achieve the end goal may differ from person to person. However, since the merging entities would no longer be separate entities, it is important that the means to achieve the end goal is also aligned. Thus, while corporate governance is very important for every organisation, it gains even more significance post a merger.

There has to be a clear understanding on the structure of the corporate governance post-merger, which could primarily be recorded discussions and step plans to achieve the objectives of the merger. For example, if the main objective of a merger is market expansion of the business, it would be good to have a clear step plan detailing out the potential markets, key people to target the same, timelines and other operational parameters which could eventually determine achievement of results as agreed amongst the key stakeholders. If a merger involves employee movement, a clear plan for the transitioning of employees, in terms of location, identification, compensation plan, positive interactions across teams and often (in new age companies) regular counselling on challenges faced may prove to be tremendously beneficial in the long run.

Also, post the merger, it is always better to have each and every discussion documented. Such discussions (including the informal discussions) should also be conducted at the board level, which would help in ensuring that the important stakeholders are part of these discussions. The objective is not to increase bureaucracy but to ensure that the operations are seamless. This might not seem to be important especially during the initial stages after a merger. However, the importance of documenting every discussion comes into play when, at some point, the difference of opinion arises. In order to avoid tense and awkward situations at that point of time, if every decision or discussion in relation to the business and operations is documented and is taken with the knowledge of all the key stakeholders, it would to a large extent help in solving the issue at hand in a much more efficient and faster manner.

A merger would, in most circumstances, result in a change in the board composition and management. The board of the merged entity will play an important role in effective management and quick transition. The composition of the board (and the committees of the board) is usually determined prior to the closing of the transaction and is documented in the transaction documents. The composition of the board (and the committees of the board) will have to be properly thought through and well planned. Every member of the board/committee needs to understand their respective roles. It is important to ensure that there is equal representation for all the key stakeholders. The members of the board/committees have to be diverse, experienced and should have a clear understanding of the goals of the merger. Also, it is important to conduct review meetings to ensure that the goals or targets are being met and if not, analyse on the reasons and improve on the same. The board/committee meetings may be conducted on a regular basis.

It may be a good option to appoint an independent director to the board. This will help in situations where there is a difference of opinion between the various members of the board since the independent director will be a neutral party and would be able to give unbiased opinions. The independent directors bring objectivity and an independent opinion to the decisions made by the directors. They can also help in bringing more transparency to the proceedings of the board and also ensure that the interests of the shareholders are given due regard. However, an independent director can play a major role in ensuring good corporate governance only as long as he/she functions independently. His/her decisions should not be influenced by the other board members. Refer to our previous post on Independent Directors to know more about independent directors and their independence.

Conclusion

Even though there is no specific statute or law governing corporate governance as a whole in case of unlisted companies, there are various provisions under the Companies Act, 2013, SEBI guidelines, etc. which indirectly strives to have a good corporate governance system like provisions for appointment of independent directors and their roles and duties, appointment of audit committees, role of directors, etc.

To achieve the goals and objectives of the merged organisation and for a smooth transition, a well-structured corporate governance is vital.

 

Author: Paul Albert, Associate at NovoJuris Legal

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

Independent Directors- Are they Independent in their Judgements?

Independent Directors (ID) bring objectivity and an independent opinion to the decisions made by the directors of the company. IDs play a supervisory role and take into account the interests of shareholders, creditors, employees and other stakeholders in general. While IDs generally do not take part in the day-to-day functioning, their acumen should be such that they ask the right set of questions to ensure that the decisions made by the directors are in the best interest of the company, so that concentration of power or special influence can be adequately balanced and in the best interest of the company. IDs will have to take an active interest in the decision-making process not only in the meeting of the Board but also generally take steps to ensure that the interests of all stakeholders are protected.

Kumar Mangalam Birla committee report opines that “Independent Directors are directors who apart from receiving director’s remuneration do not have any other material pecuniary relationship or transaction with the company, its promoters, its management, or its subsidiary, which in the judgment of the Board may affect their independence of judgment”.

Appointment of IDs is mandatory to all public listed companies and unlisted public companies who have (i) share capital more than Rs. 10 crores (ii) turnover of more than Rs.100 crores (iii) total outstanding loans, debentures, deposits is more than Rs 50 crores. In case of private limited companies, where institutional investors or venture capital investors have investments, they usually opt for an independent director to be on the Board.

The Companies Act, 2013 entrusted the governance to the Board of Directors and the Audit Committee for detection and prevention of fraud. The directorship is a fiduciary position and each person on the Board are exposed to many liabilities, not only under Companies Act but under various other legislation. Considering the fact that the IDs being nonexecutives on Board, they themselves cannot play an effective role even though they have a full commitment to ethical practices. Therefore, the executive directors shall have to be proactive and transparent in decision making and it is expected that IDs are informed about all facts, activities, and ongoings, beyond a structured/mandatory sharing of financials and mandatory board meeting agenda items.

IDs once appointed shall be equally responsible for wrongdoings in the Company. Therefore, before taking any directorship, the IDs may pose certain questions to the Company as provided herein below:

(i) Check on conflict of interest, whether such IDs has any pecuniary relationship with the Company directly or indirectly; (ii) The expectations of the Board from ID; (iii) Board Process on decision making, flow of information to its directors etc; (iv) Compliance status under various statutes as may be applicable to the company; (v) Risk and controls in relation to business and measures taken to mitigate such risks; (vi) Adaptability of the promoters towards suggestions of the Board. The expectation is that the executives shall run the show and non-executive board shall act as advisors; (vii) Check on whether the directors have the Directors and Officers Liability insurance policy.

A prima facie question that usually arises prior to taking an ID position is the liabilities. You can access our handbook on Directors here: https://drive.google.com/file//0BytybNhvfzRcb0JfRUFGQVpmaDQ/view?usp=sharing Eligibility Criteria to be an Independent Director

Independent Director shall be a person:`

  • who is not an executive director or nominee director;
  • who shall possess appropriate skills, experience, and knowledge in one or more fields of finance, law, management, sales, marketing, administration, research, corporate governance, technical operations or other disciplines related to the company’s business.
  • who is or was not a promoter of the Company or its holding, subsidiary company or associate company and shall not be related to any of these persons;
  • who including his relatives has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors, in last two preceding financial years or during the current financial year;
  • who holds together with his relatives two percent. or more of the total voting power of the company;
  • who, neither himself nor any of his relatives—
    • holds or has held the position of a key managerial personnel or is or has been an employee of the company or its holding, subsidiary or associate company in any of the three financial years preceding the financial year;
    • is or has been an employee or proprietor or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, to:
      • a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or
      • any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to ten percent. or more of the gross turnover of such firm;
  • holds together with his relatives two per cent. or more of the total voting power of the company; or
  • is a Chief Executive or director, by whatever name called, of any non-profit organization that receives twenty-five percent. or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds two percent. or more of the total voting power of the company; or

Are they really Independent in their Judgements?

Most of the Companies in India are family run business, where a majority of the decisions are taken by the promoters (without consulting any other non-executive directors). Further, these promoters hold a majority of the shares in the company, thereby the interest of these promoters are influenced in every such decision. Though, under law the shareholders appoint the independent director, but the process of selection of the independent director, is the existing directors who nominate the independent candidates for the post of the independent non-executive director, that too in consultation with the promoters and the shareholders accepts the nomination on the basis of the recommendation of the Board.

So, the very appointment is dependent on the recommendation being provided by the promoters, it would be hard to explain that the IDs do in fact exercise complete independence.

Despite many fallouts in the real world on the transparency of board’s decisions in their presence, IDs are the only hope to uplift the discipline/ transparency, provided their independence is not being compromised and decisions are taken professionally. If they are no more independent then their appointment in a company will have limited benefit as IDs. (of course, their business acumen and domain expertise is always of value).

Even if one or two of them are independent of their judgment and takes a fair and prudent view, they may be compromised by the decision of the majority. So, in some sense, are the independent directors actually dependents? This is a very strong question and we believe that the way the legislation is proposing for appointment and remuneration of the independent directors, should be re-evaluated.

Author: Ashwin Bhat, is a Junior Partner at NovoJuris Legal

ARRESTS IN CONNECTION WITH INVESTIGATION BY SERIOUS FRAUD INVESTIGATION OFFICE

NOTIFICATION OF THE COMPANIES (ARRESTS IN CONNECTION WITH INVESTIGATION BY SERIOUS FRAUD INVESTIGATION OFFICE) RULES, 2017.

The MCA vide its notification dated 24 August 2017 has notified the Companies (Arrest in connection with Investigation by Serious Fraud Investigation Office) Rules, 2017 which stands effective from 24 August 2017.

Key highlights:

  • Where the Director, AdditionalDirector or Assistant Director of the Serious Fraud Investigation Office (herein after referred to as SFIO) investigating into the affairs of a company other than a Government company or foreign company has, on the basis of material in his possession, reason to believe (the reason for such belief to be recordedin writing) that any person has been guilty of any offence punishable under section 212of the Act, he may arrest such person; Provided that in case of an arrest being made by Additional Director or Assistant Director, the prior written approval of the Director SFIO shall be obtained.
  • The Director SFIO shall be the competent authority for all decisions pertaining to arrest.
  • An arrest register shall be maintained in the office of Director, SFIO and the Director or any officer nominated by Director shall ensure that entries with regard to particulars of the arrestee, date and time of arrest and other relevant information pertaining to the arrest are made in the arrest register in respect of all arrests made by the arresting officers
  • The provisions of the Code of Criminal Procedure, 1973 (2 of 1974), relating to arrest shall be applied mutatis mutandis to every arrest made under this Act.

Source: http://www.mca.gov.in/Ministry/pdf/companiesArrestsconnectionSFIORule_25082017.pdf