Tag Archives: ministry of corporate affairs

Regulatory Update: MCA amends Incorporation Rules in relation to Shifting of Registered Office and Incorporation fee for companies

As part of Government’s efforts to make India a startup hub and continuous efforts of ease of doing business in India, the Ministry of Corporate Affairs (the MCA) has issued notification dated 6 March 2019. With this notification following changes will come into effect:

Sl No Category Before Amendment After Amendment Effect of this amendment
1. Shifting of Registered Office from One State to Another The Companies desirous to shift their Registered office from one state to another state shall advertise the notice of shifting the registered office in a vernacular newspaper in the principal vernacular language in the district and in the English language in an English newspaper with the widest circulation in the State in which the registered office of the company is situated.

 

 

 

 

The Companies desirous to shift their Registered office from one state to another state can advertise the notice of shifting the registered office in a vernacular newspaper in the principal vernacular language in the district and in the English language in an English newspaper with the wide circulation in the State in which the registered office of the company is situated.

 

 

This will remove the confusion among the stakeholders with respect to publication of notice in the newspaper and they can choose the newspapers with minimum circulation as well.

 

Prior to amendment if any Company choose to publish in 2nd widest circulation newspaper, then the application would be rejected and this entails to start shifting process a fresh and this would take additional 3-5 months to complete.

 

With this relaxation, companies can choose among various newspapers which has wide circulation.

2. Fee on Incorporation of a Company The companies incorporated with a nominal capital of less than or equal to rupees ten lakhs, fee on INC-32 (SPICe) shall not be applicable. The companies incorporated with a nominal capital of less than or equal to rupees fifteen lakhs, fee on INC-32 (SPICe) shall not be applicable with effect from 18 March 2019. Earlier the Companies with initial authorised capital up to INR 10 lakh was exempted from any MCA fee on Incorporation and only stamp duty was applicable.

 

Now the exemption limit has been increased to INR 15 lakh. Therefore, Companies to be incorporated with nominal capital up to 15 lakh is exempted from MCA fee and stamp duty shall continue to be applicable.

 

Source: http://egazette.nic.in/WriteReadData/2019/199251.pdf

Synopsis of Amendments made to the Companies Act, 2013 in the year 2019 and allied Action Points

The Ministry of Corporate Affairs (the MCA) in the month of January & February 2019 has issued the following amendments notification under the Companies Act 2013 (the Act):

(a) Changes in Companies (Significant Beneficial Owners) Rules 2018 to identify individuals/entities having significant control over the affairs of a company

(b) Companies (Incorporation) Rules, 2014 mandating all the companies incorporated prior to 31 December 2017 to upload all their particulars of various compliances including details of registered office in Form INC 22A Active.

(c) Specified Companies (Furnishing of information about payment to micro and small enterprise suppliers) Order, 2019, mandating all the companies who receives goods or services from MSME and the payment for which is not made within 45 days from the date of acceptance or the date of deemed acceptance of goods or services from MSME to report such transactions in MSME Form I.

(d) Changes in Companies (Acceptance of Deposits) Rules, 2014 mandating all companies to file a return of deposits in Form DPT 3 with the MCA, furnishing information about filing the transactions that have not been considered as a deposit or both under the Companies (Acceptance of Deposits) Rules 2014 (Deposit Rules).

The action points under these notifications are as below:

Sl. No Particulars Summary of Notification Form to be filed Due date
1. The Companies (Significant Beneficial Owners) Amendment Rules 2019[1] Who shall disclose?

Every individual, who acting alone or together, or through one or more persons or trust, possess one or more of the following rights in a company shall be deemed to be a significant beneficial owner (SBO):

·  holds indirectly, or together with any direct holdings, at least 10% of the shares or voting rights;

·   has the right to receive or participate (by virtue of their indirect and/or direct holdings) is not less than 10% of the total distributable dividend or any other distribution; or

· has the right to exercise significant influence or control (through their indirect holdings only) on the company.

However, individuals directly holding shares of the company in their own name or hold or acquires a beneficial interest in the share of the reporting company under subsection section 89 (2) of the Act and necessary reporting is made is not be considered to be a significant beneficial owner.

Further, an individual is considered to hold a right or entitlement indirectly in the reporting company, if he satisfies any of the following criteria, in respect of a member of the reporting company, namely:

·  If the member is a body corporate (Indian or foreign) – the individual holding majority stake in that body corporate or majority stake in the ultimate holding company of such body corporate member

·  If the member is a HUF – the individual who is the Karta of the HUF

· If the member is a partnership entity – the individual is a partner or holding a majority stake in a body corporate which is a partner or majority stake in the ultimate holding company of such body corporate which is a partner

·  If the member is a trust – the individual who is a trustee (discretionary or charitable trust), a beneficiary (Specific trust), Author/settlor (revocable trust)

· If the member is a pooled investment vehicle or an entity controlled by the pooled investment vehicle – the individual who is a general partner or investment manager or Chief Executive Officer where the investment manager of such pooled vehicle is a body corporate or a partnership entity

What needs to be done?

· To send notice of this requirement to all non-individual members who hold not less than 10% of its Shares, or voting rights, or right to receive or participate in the dividend or any other distribution payable in a financial year seeking information in Form BEN-4.

·  The company to identify any such individual who is an SBO and obtain a declaration of significant beneficial ownership in Form No. BEN-1.

 Non-applicability of this requirement:

These rules shall not apply if the shares of a reporting company are held by the following entities:

· Investor Education and Protection Fund

· Holding Reporting Company of the Reporting Company (however, details of such holding company have to be filed in Form No. BEN-2)

·  the Central Government, State Government or any local Authority

·  any entity controlled by the Central Government or by any State Government or Governments or partly by the Central Government and partly by one or more State Governments;

· Investment Vehicles such as mutual funds, alternative investment funds (AIF), Real Estate Investment Trusts (REITs), Infrastructure Investment Trust (InVITs) regulated by the Securities and Exchange Board of India;

· Investment Vehicles regulated by Reserve Bank of India, or Insurance Regulatory and Development Authority of India, or Pension Fund Regulatory and Development Authority.

(a) Form BEN-1

(b) Form BEN-2

(c) Form BEN-4

 

(a) Form BEN-1- on or before 9 May 2019

(b) Form BEN-2- within 30 days from the date of receipt of Form BEN-1

(c) Form BEN-4- To be sent to seek information in Form BEN-1.

 

2. Companies (Incorporation) Amendment Rules, 2019[2] Applicability:

Every Company incorporated on or before the 31 December 2017 shall file the particulars of the Company and its registered office, in e-Form INC-22A_ACTIVE (Active Company Tagging Identities and Verification)

Pre-requisites

The Company before filing Form INC 22A Active shall ensure that it has filed the following pending forms as may be applicable:

(a) Form AOC-4- Filing of Financial statements for the previous financial year;

(b) Form MGT 7- Filing of Annual Return (e-Form MGT-7) for the previous financial year;

(c) Form DIR 12 & MR 1 as may be applicable for the purpose of appointment of whole-time company secretary. This is mandatory for the Companies whose paid-up capital is more than 5 Crore.

Non-Applicability

The following companies are not required to filed Form INC 22A Active:

1.    Companies which have been Struck off or

2.    Under the process of striking off or

3.    Under Liquidation or

4.    Amalgamated or

5.    Dissolved

Consequences of non-filing

The Company will be marked as Active non-compliant and MCA would not allow filing the following forms unless the Form INC-22A Active is filed:

a.   Form SH-7 (Change in Authorised Capital)

b.   Form PAS-3 (Change in Paid-up Capital)

c.   Form DIR-12 (Changes in Director except for cessation)

d.   Form INC-22 (Change in Registered office)

e.   Form INC-28 (Amalgamation, De-merger)

Form INC 22A Active On or before 25 April 2019.
3. The requirement of filing of MSME Form-I[3]  

With a view to support the growth of and to protect the interest of MSME’s, the MCA has issued a notification dated 22 January 2019, mandating all the Specified Companies[4], whose supply of goods or services from registered MSME and the respective payments to these registered MSME suppliers exceed 45 days from the date of acceptance or the date of deemed acceptance of the goods or services, shall file the Initial Return in MSME Form I with Ministry of Corporate Affairs

 Details required to be collected from the MSME suppliers before filing the return with the MCA

Following details are required to be collected from MSME for the purpose of filing the said form:

1. Certificate of Registration issued by the Ministry of Micro Small and Medium Scale Enterprises to the MSME to ensure that the concerned entity is an MSME.

2. Financial years to which the amount relates

3. Name of the MSME

4. PAN of MSME

5. Amount due

6. Date from which amount is due

7. Total outstanding amount due as on date of notification of this order (i.e. 22 January 2019)

8.    Reason for delay

Filing of Half yearly return

Every company who receive goods or services from MSME and whose payments to MSME suppliers exceed forty-five days from the date of acceptance or the date of deemed acceptance of the goods or services as per the provisions of the MSME Act 2006 shall file the half-yearly returns for the period ended April to September and October to March every year.

 

MSME Form I Within 30 days from the date of Notification of the said Form[5]

 

Due date for filing half yearly return

1.    For the period from April to September- On or before 31st October every year

2.    For the period from October to March- on or before 30th April of every year

4. The Companies (Acceptance of Deposits) Amendment Rules, 2019[6] Every Company shall have to file Form DPT 3 providing particulars of transaction that has not been considered as deposit[7] or both. Thus, all companies other than Government Companies will have to file Form DPT-3 also for transactions that are listed under Deposit Rules.

 Further the companies in its annual financial statements, are required to disclose about the money received from Directors (in case of companies other than private companies) and money received from Directors or relatives of Directors (in case of private companies only).

 

Form DPT 3 On or before 22 April 2019

Author: Ashwin Bhat, Junior Partner at NovoJuris Legal.

[1] Source: http://www.mca.gov.in/Ministry/pdf/CompaniesOwnersAmendmentRules_08020219.pdf

[2] Source: http://www.mca.gov.in/Ministry/pdf/CompaniesIncorporationAmendmentRules_21022019.pdf

[3] Source: http://www.mca.gov.in/Ministry/pdf/MSMESpecifiedCompanies_22012019.pdf

[4] ‘Specified companies’ means, all the Companies who receives goods or services from MSME and if the payment is not made within 45 days from the date of acceptance or the date of deemed acceptance of goods or services.

[5] MSME Form I is yet to be notified by the MCA

[6] Source: http://www.mca.gov.in/Ministry/pdf/AcceptanceDepositsAmendmentRule_22012019.pdf

[7] Transactions provided in Rule 2 of the Deposit Rules

Regulatory Update: Ministry of Corporate Affairs – Companies (Accounts) Amendment Rules, 2018

The Ministry of Corporate Affairs(“MCA”) on 31 July 2018 published the Companies (Accounts) Amendment Rules 2018.

With the amendment coming into effect, the MCA has mandated few insertions to be made by a Company while preparing its Board Report and the disclosures to be made by a Small company and One Person Company while preparing their Board Report.

The MCA has brought below amendments in Rule 8 of the Companies (Accounts) Rules 2014 which provides for the matters to be included in the Board Report of a Company:

  1. The sub-rule 5 provides for additional details to be specified in the Board Report. The MCA has inserted two more disclosures to be included in the Board Report:
  • a disclosure, as to whether maintenance of cost records as specified by the Central Government under sub-section (1) of section 148 of the Companies Act, 2013, is required by the Company and accordingly such accounts and records are made and maintained,
  • a statement that the company has complied with provisions relating to the constitution of Internal Complaints Committee under the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013.
  1. The Rule 8 is not applicable on One Person Company or Small Company.

The MCA has also inserted Rule 8A to the Companies (Accounts) Rules 2014 which is applicable only for One Person Company and Small Company. The said rule prescribes following matters to be included in Board’s Report for One Person Company and Small Company:

(1) The Board’s Report of One Person Company and Small Company shall be prepared based on the stand-alone financial statement of the company, which shall be in abridged form and contain the following: –

(a) the web address, if any, where annual return referred to in sub-section (3) of section 92 has been placed;

(b) number of meetings of the Board;

(c) Directors’ Responsibility Statement as referred to in sub-section (5) of section 134;

(d) details in respect of frauds reported by auditors under sub-section (12) of section 143 other than those which are reportable to the Central Government;

(e) explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made by the auditor in his report;

(f) the state of the company’s affairs;

(g) the financial summary or highlights;

(h) material changes from the date of closure of the financial year in the nature of business and their effect on the financial position of the company;

(i) the details of directors who were appointed or have resigned during the year;

(j) the details or significant and material orders passed by the regulators or courts or tribunals impacting the going concern status and company’s operations in future.

(2) The Report of the Board shall contain the particulars of contracts or arrangements with related parties referred to in sub-section (1) of section 188 in the Form AOC-2.

Source: http://www.mca.gov.in/Ministry/pdf/companisAccountsRules_31072018.pdf

 

Nuances associated with Issuance of Compulsorily Convertible Debentures

Compulsorily Convertible Debentures (CCDs) are considered to be hybrid instruments / and equity linked instrument, i.e. they are treated as debt till the time they are converted into equity. When they are issued it is a debt, after a period of time / milestone, it shall be compulsorily converted into shares. On the other hand, the Optionally Convertible Debentures are debt securities and interest is paid to the investors till maturity and repayment.

Under FDI guidelines, CCDs are treated as equity for the purposes of reporting to Reserve Bank of India.

 

The Companies Act, 2013 and the rules issued thereunder (the Act) provide the legal framework for the issue of Debentures[1] by Indian companies. The various kinds of Debentures are (i) Compulsorily Convertible Debentures; (ii) Optionally Convertible Debentures; and (iii) Redeemable Debentures. Section 71 of the Act states that a company could issue debentures with an option to convert into shares either wholly or partly at the time of redemption.

CCDs are considered to be convenient as it allows the investor to tap into the Company’s potential without diluting the founders shareholding percentage until the CCDs are converted into shares.

Here’s an article that we wrote way back in December 2015, which provides details on CCDs.

https://novojuris.com/2015/12/21/raising-of-funds-through-compulsorily-convertible-debentures/

In this post, we have analysed the nuances associated with the issuance of Compulsorily Convertible Debentures (CCDs).

Issuance of Securities:

Under the Act, the securities[2] could be issued in any of the following manner: (i) Private Placement Basis (section 42); (ii) Rights Issues (section 62(1)(a); (iii) Bonus Issue (section 63) and (iv) Sweat Equity (section 54).

Rights Issue: 

Section 62(1)(a) of the Act regulates the issuance of shares by way of a rights issue to the existing shareholders of the Company. Section 62 states that whenever a  company having share capital proposes to increase its subscribed capital by issue of further shares, then such shares shall be offered to persons who are holders of equity shares in the Company in proportion to their paid-up share capital.

Most of the practicing professionals opine that CCDs cannot be issued by way of rights issue since Section 62 (1) of the Act explicitly mentions issuance of “shares”. Whereas Section 42 states that a company may make a private placement of “securities”.  However, a few professionals opine that CCDs are a hybrid instrument which shall be compulsorily convertible into equity shares and therefore is considered as an equity-like instrument and they argue that the CCDs can be issued under rights issue.

Private Placement:

The rigour of following the Private Placement under section 42 is quite high, many nuances and high penalties for non-compliances.

Section 42 of the Act provides that the offer of securities or invitation to subscribe securities on a private placement basis shall be made to such number of persons not exceeding fifty or such higher number as may be prescribed, (excluding qualified institutional buyers and employees of the company being offered securities under a scheme of employees stock option), in a financial year and on such conditions (including the form and manner of private placement) as may be prescribed.

Every private placement of securities must be made with the prior approval of the shareholders of the Company by a special resolution approving the private placement offer letter. The utmost important condition under section 42 is the total face value of each kind of securities issued to each person shall be at least Rs. 20,000. The private placement offer letter is required to be accompanied by an application form addressed specifically to the person to whom the offer is being made. Additionally, the Act lays down the following requirements: (i) the offer has to be made only to those persons whose names are recorded by the company prior to the issue of the offer letter to subscribe to the securities; (ii) a complete record of offers has to be kept by the issuer in a prescribed manner, and (iii) complete information about the offer has to be filed with Registrar of Companies (the RoC) within 30 days of circulation of the offer letter.

Allotment in respect of private placement of securities (including CCDs) is required to be completed within 60 days from the date of receipt of application money. Additionally, the consideration so received towards issuance of securities (including CCDs) could be utilised only upon the securities been allotted and the return of allotment in this respect is filed with the RoC. In the event of non-allotment, the consideration so received is to be refunded to the subscribers within 15 days from the date of completion of 60 days. If the company fails to refund the consideration within the 15 days, it is liable to pay interest at the rate of 12% from the end of the 60th day.

Considering numerous disclosures, conditions and huge penalties associated with private placement basis, the practicing professionals always tends towards the rights issue mechanism which involves minimal disclosures etc.

Additional Compliance in case of Issuance of CCDs to non-residents

(a) CCDs as debt or equity instrument: It is also pertinent to note that the under the Foreign Exchange Management Act, 1999 and rules, regulations made thereunder (FEMA), any investment by any non-resident towards CCDs are considered as equity instrument under FDI guidelines. However, the investment by non-resident towards Optionally Convertible and Redeemable Debentures are considered as debt instruments and being construed as External Commercial Borrowings.

(b) Terms of Conversion of CCDs: The terms of conversion are to be decided upfront at the time of issuance of these CCDs. It is important to note that the price/conversion formula of convertible capital instruments should be determined upfront at the time of issue of the instruments and the price at the time of conversion should not, in any case, be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with the provisions of FEMA. It may also be noted that there are no explicit restrictions on variation/change in terms of conversion either under the Act or under FEMA. However, the Reserve Bank of India (the RBI) has raised objections to such change in terms of conversions.

(d) Fair Market Valuation: The CCDs shall be issued at or above the fair market value as on the date of issuance of such CCDs. The valuation of CCDs shall be done as per any internationally accepted pricing methodology for valuation on an arm’s length basis duly certified by a Chartered Accountant or a Securities and Exchange Board of India registered Merchant Banker or a practicing Cost Accountant.

Closing remarks:

Considering nuances associated with the issuance of CCDs on private placement basis and the

statutory provisions with regard to issuance of CCDs on rights basis being silent, the method of issuance has become slightly ambiguous and lead to varied interpretations. A clarity to this effect from the Ministry of Corporate Affairs would help and aid all stakeholders to issue CCDs without resorting to various interpretations.

Author: Shruthi Shenoy, is an Associate with NovoJuris Legal

[1] Debenture is defined under 2(30) of the Companies Act 2013 as Debenture includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not.

Provided that: (a) the instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934; and (b) such other instrument, as may be prescribed by the Central Government in consultation with the Reserve Bank of India, issued by a company, shall not be treated as debenture;

[2] The term “securities” includes debentures.

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Regulatory Updates: Ministry of Corporate Affairs – Notification of the Companies (Acceptance of Deposits) Amendment Rules, 2017

Ministry of Corporate Affairs vide its notification dated 11 May 2017 has amended the Companies (Acceptance of Deposits) Rules 2014 to include “Infrastructure Investment Trusts” in the exemption category and to defer “deposit insurance” for another one year (till 31 March 2018) in the absence of suitable deposit insurance product in the market.

Section 73(2) of the Companies Act 2013 read with Rule 5 of Companies (Acceptance of Deposits) Rules, 2014 mandates that every company inviting deposits shall enter into a contract for providing deposit insurance at least 30 days before the issue of circular or advertisement or renewal as the case may be. However, in view of non-availability of such deposit insurance products, companies are now allowed to raise deposits without any deposit insurance till 31st March, 2018, as per proviso to Rule 5(1) of the Companies (Acceptance of Deposits) (Amendment) Rules, 2017.

Source

Shutting Down A Company – Fast Track Exit Under The New Companies Act 2013

One of the quick ways to shut down a company, when non-operational over a period of time, was through a process called Fast Track Exit (FTE). In its place, under the Companies Act, 2013 has brought in a process called Removal of Names of Companies from Register (Section 248 of Companies Act, 2013), with effect from 26 December 2016.

On 26 December 2016, Ministry of Corporate Affairs (MCA) issued a Notification notifying Section 248, 249, 250, 251 and 252 of Companies Act, 2013 (Chapter XVIII). This chapter deals with Removal of Names of Companies from Register of Companies.

Company Shut Down.jpg

A company can apply for a shut down under the new process when:

  1. A company has failed commence business within one year of incorporation,
  2. The subscribers to MOA have not paid the subscription amount within 180 days and no declaration filed to this effect,
  3. Not carrying any business or operation for a period of two years (earlier it was one year) and has not sought to call itself a dormant company,
  4. When a company voluntarily wants to shutdown, it can, after clearing all its liabilities, by obtaining consent of atleast 75% of shareholders in terms of paidup capital.

Non-eligibility of companies to shut down under the new process:

  1. Listed companies, not for profit (section 8) companies, vanishing companies, non-compliant companies under various statutory laws, where investigation or inspection or enquiry is ordered, where prosecution or application for compounding is pending, where the assets of the company still have a charge on them.
  2. If three months prior to such application, a company had changed its name, shifted registered office, has disposed property or rights for value, made an application to National Company Law Tribunal (NCLT) for any compromise or arrangement or is under a winding up process.

These are some measures to ensure that there are no fraudulent applications for removal of name, including ensuring there is no intention to deceive creditors or defraud any person.

The new Rules, Companies (Removal of Names of Companies from the Register of Companies) Rules, 2016 at a high level:

  1. Removal of name of company from Register by ROC on suo-moto basis.
  2. Forms for making an application by the Company (Form-STK2) is notified, along with a fee of INR 5000, along with an Indemnity Bond from directors, Statement of Accounts certified by a chartered accountant, Affidavit from directors, Shareholders special resolution signed by every director, a statement that there are no pending litigations involving the company.
  3. An application filed, will be cross-verified by ROC, by giving a notice to all the directors at the address on record, along with reason cited by company for shutting down and if the directors have any representation to make/seek.
  4. ROC will further intimate and seek objections if any, from income tax, central excise, service tax authorities. There is a time line of 30 days within which such authorities have to respond and if no response is received, then it is presumed that such authorities do not have any objection.
  5. Based on the company’s business, such as NBFC, insurance, housing finance, collective investment schemes, asset management companies, then ROC requires a no-objection certificate from the applicable regulatory bodies.

Public Notice:

  1. ROC on receipt of application, issues a public notice, by notifying on MCA’s website. It appears that MCA will provide for a separate webpage for notifying public for all applications received by them in this regard.
  2. Publish in Official Gazette
  3. Publish in newspaper (English and vernacular) having wide circulation in the State where the registered office of the company is located
  4. If a company has applied for shutdown, then the company will have to notify on its own website

Effect of company notified as dissolved:

Though the company has been dissolved and its name removed from the ROC’s registers and intimation provided to tax authorities, it has to be noted that liabilities, if any, continues on every director, key officer, members of the company continues and may be enforced as if the company had not been dissolved.

This is the major difference between the process as described above and winding up through NCLT.

With detailed rules, process, forms and guidance, the Government has provided much clarity. The rules also provides for clear timelines for statutory bodies to respond. It would have been nice if timelines were established for disposal of application by the ROC as well. The expenses of opting this route of shutdown has marginally gone up, due to newspaper notification to be published.