Tag Archives: NovoJuris Legal

M&A through Share Swap/Stock Swap Arrangements


A share swap arrangement signifies issuance of a share in exchange for a share rather than remittance of cash consideration. Share Swap arrangements occur when shareholders’ ownership of the target company’s shares is exchanged for shares of the acquiring company as part of any restructuring.

For instance, two companies, A and B, come together to form company C. If the two companies enter into a Share Swap Arrangement, the shareholders of company A can be given shares of company C for every share of company A that they owned. A similar arrangement can be made for company B as well. Now, if such an arrangement occurs between companies wherein the Indian parties are shareholders of the Indian company and the other company is a foreign company, the arrangement would attract both regulations prescribed under the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 (the ODI Regulations) and the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017 (the FDI Regulations).

Share Swap arrangements can be useful mechanisms to raise investment in the case of an externalisation plan. Externalisation plans involve promoters of Indian entities moving their holding entities outside India (in case more information about externalisation is required, refer to our article on externalisation schemes, which can be accessed at https://novojuris.com/2018/06/24/ externalisation-many-Indian-startups-are-choosing-to-have-their-holding-entity-outside-india/).

In such scenarios, both FDI Regulation and ODI Regulations become applicable owing to the fact that there is a transfer of shares of an Indian company to a person resident outside India and there is an acquisition of shares of a Foreign Company by a resident Indian in the manner. Therefore, an adherence with the applicable FDI Regulation and ODI Regulation is required for the share swap arrangements.

Implications under FDI Regulations

The FDI Regulations would be applicable in the case of a share swap arrangement where any one company to the transaction is non-resident and the transaction becomes eligible to be governed by the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 and Foreign Direct Investment policy (“FDI Policy”) issued by the Department of Industry Policy and Promotion every year. A key thing that has to be kept in mind is that as per the FDI Regulation, the price of shares offered should not be less than the fair market value of shares valued by SEBI registered Merchant Banker.

Reporting Requirements

The FDI policy provides primarily for two types of reporting mechanisms:

  1. one through the filing of an FC-TRS (Foreign Currency- Transfer of Shares) Form by the Indian company which becomes applicable in the case of transfer of shares, where one party is a non-resident and another one being a resident Indian; and
  2. second being through the filing of an FC-GPR (Foreign Collaboration- General Permission Route) Form by the Indian company which becomes applic`able in the case of allotment of-of shares by an Indian Company to a person resident outside India.

General permission has been granted to non- residents to acquire shares from Indian shareholders under swap arrangement, provided that the price of shares offered is not less than the fair market value of shares valued by SEBI registered Merchant Banker. However, in the case of share swap arrangement between the entities whose sector is under Government approval route, prior approval would be required.

Implications under ODI Regulations

As mentioned above, the ODI Regulations would be applicable in the case of a share swap arrangement where any one company to the transaction is non-resident. In case of share swap arrangement under externalization, the shareholders of Indian company who are resident Indians would acquire shares of the foreign company in exchange for their shares of the Indian company. The share swap arrangement under the ODI Regulations would fall under the automatic route unless otherwise prescribed under FDI Regulation. The arrangement would also be subject to the sectoral caps and entry mechanisms as applicable under the FDI Regulation and approvals from the relevant ministries.

Reporting Requirements

The resident Indian shareholders of an Indian company would be required to file Form ODI with the Authorised Dealer Bank for reporting the share swap arrangement. The Form is required to be submitted to the RBI within 30 (thirty) days of making the share swap.


From a regulatory standpoint, the key question which is not clear is whether the share swap arrangement would fall under general permission category of ODI Regulation & FDI Regulation or under the Government approval. While the respective regulations are clear that prior approval is needed only in case if the sector is under approval route as per FDI Policy and FDI Regulation. However, practically it has been seen that the Reserve Bank of India on case to case basis, has insisted upon such prior approval requirement. There is a need for better clarification or notification from the Reserve Bank of India.

Additionally, it is pertinent to note that the ODI Regulation mandates for prior approval of the Foreign Investment Promotion Board (FIPB) which has been abolished in 2017. Now, in case any such approvals are required, the proposals will be scrutinized and cleared by sector-specific departments concerned.

Authors: Mr Spandan Saxena and Mr Ashwin Bhat


Regulatory Update:Notification of Regulations For Civil Use Of Remotely Piloted Aircraft System (RPAS)

The Ministry of Civil Aviation on 27 August 2018 by way of a Press Note released the Drone Regulations 1.0 in the furtherance of enabling safe, commercial usage of drones effective from 1 December 2018. The Press Note provides for the setting up of a Drone Task Force under the Chairmanship of the Minister of State to provide draft recommendations for Drone Regulations 2.0.

The Office of the Director of Civil Aviation furthermore released a detailed document containing requirements for the operation of RPAS on 29 August 2018.

The Regulations provide for an online platform for registering and operation of drones by the name of the Digital Sky Platform. This platform is designed to be an unmanned traffic management (UTM) platform which can be operated through a mobile application and users will be required to seek permission on this application. The request for use of drone would be processed by an automated algorithm and the request would be subjected to acceptance or refusal almost immediately.

These Regulations implement the policy of no usage without registration. Every drone user would be required to register their drones and a Unique Identification Number (UIN) would be generated against such registration. This registration would be in regard to the drone and not the user. The user would be required to seek permission to use the drones before every instance of usage.

Under the Regulations RPAS have been categorised into 5 categories based on their maximum take-off weight:

  1. Nano :       Less than or equal to 250 gm
  2. Micro :       Greater than 250 gm and less than or equal to 2 kg.
  3. Mini :       Greater than 2 kg and less than or equal to 25 kg.
  4. Small  :        Greater than 25 kg and less than or equal to 150 kg.
  5. Large :       Greater than 150 kg

The requirement for seeking permission for use of RPAS systems does not apply for drones falling under the nano category. The UTM would operate as a traffic regulator in the drone airspace and would co-ordinate closely with defence and civilian air traffic controllers to prevent unauthorised flights and to ensure that drones remain on approved flight paths.

Additionally, an Unmanned Aircraft Operator Permit would be required by RPA operators. The requirement to obtain this permit does not apply in the case of nano RPAS operating below 50 feet, micro RPAS operating below 200 feet and for RPAS owned by the NTRO, ARC or Central Intelligence Agencies. However, micro RPAS operators would be required to provide an intimation to their local police station at least 24 hours prior to usage. In regard to usage by agencies, they would be required to provide an intimation to local police stations and ATS units prior to usage.

For all RPAS other than those falling under the nano category, the mandatory equipment required for operation are:

  1. Global Navigation Satellite System (GPS)
  2. Return-to-home
  3. Anti-collision light
  4. ID plate
  5. Flight controller with flight data logging capability
  6. Radio Frequency Identification (RFID) and SIM/ No Permission No Takeoff

In addition, RPAS are under a requirement to operate within visual line of sight, during the day and only upto a maximum altitude of 400 feet. The Regulations also demarcate the permissible zones for operation of drones. The zones have been categorised into three categories:

  1. Red Zone: operation of drones not permitted
  2. Yellow Zone: this is a controlled zone and operation of drones would be subject to prior approval. For operation of drones in this zone, filing of flight plans and obtaining Air Defence Clearance/ Flight Information Centre number would be necessary.
  3. Green Zone: this would form the uncontrolled airspace with an automatic permission for operation of drones.

The Regulations also define No Drone Zones which would cover the following areas:

  1. Radius areas of 5 kms from airports
  2. Within a radius of 50 km from the international borders
  3. Within a radius of 5 km from Vijay Chowk
  4. Buildings such as State Secretarial Complex in State Capitals, strategic and military installations

The enforcement actions provided for include:

  1. Suspension or cancellation of registration or permit
  2. Penalties under the Aircraft Act, 1934 or Aircraft Rules
  3. Penalties under Indian Penal Code

Source: https://pbs.twimg.com/media/DlmxNbvU8AA1II-.jpg



Mauritius: A Prime Financial Center for FPI Investments in India

 A. SEBI Circular Letter Dated 10 April 2018

On 10 April 2018, the SEBI, issued a circular titled ‘Know Your Client Requirements for Foreign Portfolio Investors (FPIs)’ clarifying its position on the concept of identification and verification of Beneficial Owner of an FPI (BO). The Circular fell as a death knell to NRIs (Non-Resident Indians), PIOs (Persons of Indian Origin) and OCIs (Overseas Citizens of India) who are BOs of FPIs by imposing a blanket restriction on the eligibility of such category of persons to make investments as FPIs. In essence, the Circular retains the concept of controlling ownership interest and control basis for identification of BOs. Hence, in case of a company, the BO is identified as per the materiality threshold of 25%, and in case of other entities such as a partnership firm or trust, the threshold stands at 15%. As for “high-risk jurisdictions,” a lowered materiality threshold of 10% is applicable.

It is now expected that SEBI will review its position on the BO construct by excluding PIOs and OCIs from the Beneficial Ownership restrictions imposed by the April Circular. However, no official confirmation to that effect has been obtained yet. In any event, while the intent of the Circular is to curb the evils of money laundering and round-tripping of funds, NRIs who currently hold significant interest in Indian equities and coming in as FPIs or through offshore funds, may get affected as from 10 October 2018 which is the deadline for existing FPI structures to rejig their operations and comply with the new requirements.

B. Mauritius not a High-Risk Jurisdiction

According to certain media reports, SEBI had requested custodian banks to prepare a list of such high-risk jurisdiction and among the names submitted were China, Cyprus, UAE and more significantly Mauritius. However, pursuant to a high-level discussion between the Mauritius Financial Service Commission and SEBI, it was subsequently confirmed that SEBI is neither working on nor contemplating to produce any list at its level, which will identify Mauritius as a High-Risk jurisdiction. At this meeting, the FSC received the comfort that SEBI acknowledges all initiatives undertaken by Mauritius to ensure full adherence to best international norms and practices with respect to regulatory oversight and enforcement. (vide https://www.fscmauritius.org/media/54904/fsc-issues-communique-high-level-discussions-between-the-financial-services-commission-fsc-and-the-securities-and-exchange-board-of-india-sebi.pdf).

C. Mauritius, still attractive for FPI?

The Mauritian legislations caters for structures which allow domestic funds to invest into another fund established in another jurisdiction. The core traits of such type of structures are to invest in a portfolio that contains different underlying assets instead of investing directly in bonds, stocks and other types of securities.

The prevailing Acts and Regulations contain provisions for the structuring of Fund of Funds where the concept relates to a feeder fund whose main role is to pool funding from worldwide investors and then inject the capital amount into a master-feeder fund domiciled outside Mauritius, for instance, an Alternative Investment Fund (Category 1) established in India. Under such equation, the AIF will be subject to Indian regulations and will ventilate the money received from the Feeder Fund in Mauritius into short-term and/or long-term investments.

The Mauritian framework and regulations also offer the possibility to incorporate a multiclass Fund. Such Fund is well reputed to invest under the FPI route and meet the definition of a broad-based fund under the SEBI regulations. The regulations in Mauritius are flexible enough to formally register a Fund with multiple sub-fund where segregation of assets and liabilities can be done under the creation of sub fund for each type of investors and underlying investments. Provided that some conditions are met, this Fund can apply for FPI license and engaged in investment activities in quoted securities and/or private equity investments.

Investments in securities:

Quoted investments made through the FPI route in India are now subject to tax following the Treaty re-negotiation. It is to be noted that income from the sale of shares is characterized as capital gains and at present, FPIs enjoy the benefits of the capital gains provisions under the India-Mauritius DTAA.  While there is a zero percent rate applicable on gains arising out of shares that are listed and sold on a recognized stock exchange if such shares are held for more than 12 months, capital gains arising out of investments are subject to a tax rate of 15% (exclusive of applicable surcharge and cess) if such shares are held for less than 12 months i.e. short-term capital gains. During the Transition Period (1 April 2017 – 31 March 2019), and subject to the satisfaction of the limitation of benefits clause, this rate may be reduced to 7.5%. Hence, while short-term capital gains have been affected by the treaty re-negotiation, long-term investments in shares of listed Indian Companies are not affected by the DTAA amendment and continue to enjoy the treaty benefits. The above should be read in light of recent legislative changes brought to the (Indian) Income Tax Act which extends the scope of capital gains taxation to gains on the transfer of a long-term capital asset with effect from 1 April 2018. While the amendments to the taxation of LTCG would not affect transfers made on or before 31 March 2018, the impact on securities acquired on or after 1 April 2017 and transferred on or after 1 April 2018 would be taxable at the maximum marginal rate of 10.92% of gains arising from the transfer of these securities. In the latter case, gains arising from sale or transfer of long-term equity shares shall be taxable at the rate of the 50% of the prevailing domestic (Indian) tax rate under the DTAA, that is, 5.82% plus applicable charge and cess for shares acquired after 1 April 2017 and sold before 31 March 2019. As for shares sold post 31st March 2019, the full domestic rate will apply.

In a nutshell, it is posited that the modification on capital gains taxation is limited to gains arising on sale of shares. This ensures continuity of benefit to other instruments and also provides much-needed certainty in respect of the position of the India-Mauritius DTAA. Mauritius still retains its attractiveness as far as channeling of foreign portfolio investments is concerned, the more so that other alternative structures are being constantly explored so as to offer wider options to investors.

Debt Investment:

Mauritius accounts for the highest level (about 16%) of total foreign portfolio inflows in India after the US. It is considered as an inexpensive and a favourite route for many NRI and PIO investment managers. Furthermore, it is not gainsaid that following the re-negotiation of the India-Mauritius DTAA in 2016, Mauritius still remains a competitive jurisdiction for making debt investments through the FPI route in listed securities either on the primary or secondary markets in India.

Essentially, a foreign investor investing in debt instruments could earn the following incomes from investments in India: either (a) gains arising from sale / transfer of securities held in Indian companies or (b) interest income.

It has been clarified that any gains arising to an FPI from the sale of securities (equity or debt) held in Indian companies will be characterized as ‘capital gains.’ Under the India-Mauritius DTAA, if the gain from the alienation of debt instruments (compulsorily, optionally and non-con­vertible debentures), other than redemption premium, is treated as ‘capital gains’, such instruments shall only be tax­able in Mauritius, which is beneficial as Mauritius does not levy a tax on capital gains.

As for interest income, the Protocol provides that all Mauritius entities including banks earning interest income from Indian sources will now be required to pay tax at a rate of not more than 7.5% of the gross amount of interest provided that the Mauritius entities are the beneficial owners of such interest income.  Furthermore, in case the domestic (Indian) tax rate is lower than 7.5%, then it is the domestic rate which will be applicable. Based on the above analysis, it can be said that for now, Mauritius is certainly the preferred route for investing in the debt market in India and now emerges as the preferred jurisdiction for debt investments consider­ing the lower withholding tax rates for interest income as well as the capital gains tax exemption, as compared to such other jurisdictions as Singapore (15%) and Netherlands (10%).

D. Benefits of Using Mauritius

Mauritius has built a solid reputation of being a jurisdiction of substance internationally. Supported by its legislative framework and financial services infrastructure, Mauritius offers an ideal platform for investments around the globe with a focus on Africa and Asia including India.

While the current fiscal advantages will play a major role in the choice of jurisdiction for a cross-border investment, they are not the only factors which should be taken into account. Mauritius is considered as one of the most reputable offshore financial centers in the world, for a number of reasons including:

  1. well established administrative infrastructure for setting up and operating special purpose vehicles;
  2. a well-established rule of law founded on the Common and civil law;
  3. its modern and flexible company legislation which is based on the Anglo- Saxon laws;
  4. compliance with anti-money laundering laws and international standards;
  5. Mauritius has never been blacklisted internationally by any of the OECD, FATF or UN;
  6. the long-term commitment and support of the Mauritius government in the development of the financial services sector;
  7. its political stability and a free market economy;
  8. several Investment Protection and Promotion Agreements which have been signed in order to safeguard investors business and assets;
  9. the relatively low cost of services compared to other jurisdiction;
  10. Unlike such offshore jurisdictions like Singapore which does not have any specific corporate structures that are geared towards investment funds, Mauritius has a variety of corporate structures which can be used to channel foreign portfolio investments, including for example Expert Fund or Professional CIS regulated by the Financial Services Commission;
  11. an educated and bilingual workforce;
  12. good international telecommunications services;
  13. Presence of the Mauritius FSC Representative Office in Mumbai as a key point of contact for SEBI; and
  14. a convenient time zone location which allows for the conduct of business in the Far East in the morning, Europe during the early afternoon and the United States, later in the day

E. What Next?

Mauritius has been undoubtedly a vibrant International Financial Centre during the last 25 years. Its strategic location, its stable socio-political environment, its business-conducive framework, it’s well-established and yet competitive regulatory framework, and its connectivity and openness to the rest of the word makes Mauritius an attractive hub for financial services and capital raising, linking Asia/Europe/USA to Africa. With more challenges ahead and investors seeking for long-term visibility, new legislative changes have been brought by the Finance (Miscelleneous Provisions) Act 2018 to the global business sector in order to bring more certainty, clarity and harmonisation to the treatment of foreign investors and cross-border investments alike. Mauritius is now gearing itself towards becoming a leader in the African region and beyond. Policy makers are presently in the process of elaborating a 10 year ‘Blueprint’ for the Financial Services sector, which will make significant in-roads into existing and new activities which Mauritius has to offer from its jurisdiction.

This Article is authored by our Mauritius partner Anex Management Services Limited, licensed by Mauritius Financial Services Commission and having more than 20 years of experience in providing incorporation, accounting, compliance and administration services to global business entities in Mauritius.

Post Formation Compliance Requirements for Alternative Investment Funds (AIFs)

AIFs are privately pooled investment funds in India, typically set up in the form of a trust or a company or a body corporate or a Limited Liability Partnership (LLP). Please see our previous post to read more on a brief introduction to AIFs.

As per the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (the ‘AIF Regulations’), an AIF can be registered in one of the following three categories:

Categories Particulars Type Tenure
Category I Mainly invests in start-ups, SME’s or any other sector which Govt. considers economically and socially viable. Close Ended Determined at the time of application which shall be minimum 3 years.
Category II Private equity funds or debt funds for which no specific incentives or concessions are given by the government or any other Regulator Close Ended Determined at the time of application which shall be minimum 3 years.
Category III Hedge funds or funds which trade with a view to making short-term returns or such other funds which are open-ended and for which no specific incentives or concessions are given by the government or any other Regulator. Open Ended or Close Ended No specific tenure


Reporting Mechanism

For proper adoption of the AIF regulations, 2012 the Securities and Exchange Board of India has issued the Operational, Prudential and Reporting Norms for Alternative Investment Funds vide its Circular No. CIR/IMD/DF/10/2013 dated 29 July 2013. Furthermore, in order to ensure conformity with the operational guidelines, the SEBI introduced the “Guidelines on disclosures, reporting and clarifications under AIF Regulations” vide its Circular No. CIR/IMD/DF/14/2014 dated 19 June 2014.

Following are the reporting obligations for all categories of AIF:

  1. As per Regulation 28 of the AIF Regulations, periodical reports (with respect to funds raised, net investments by the AIF, leverage undertaken if any, exposure, categories of investor, etc) shall be submitted by all AIFs to the SEBI with respect to their activity.
  2. Category I and II AIFs and Category III AIFs that do not undertake leverage shall submit a quarterly report with the SEBI as per the Annexure I.
  3. Category III AIFs undertaking leverage shall submit a monthly report with the SEBI as per Annexure II.
  4. As per the Circular No. CIRCULARSEBI/HO/IMD/DF1/CIR/P/2017/87 dated 31 July 2017 the aforementioned reports shall be submitted through the SEBI Intermediary Portal at https://siportal.sebi.gov.in
  5. Such reports shall be submitted within 7 calendar days from the end of the quarter/end of the month as the case maybe.

Further, all AIFs have to comply with the requirements of preparation of a Compliance Test Report (CTR) as laid down below:

  1. At end of financial year, the manager of an AIF shall prepare a compliance test report on compliance (an exhaustive reporting of the AIF’s activities) with AIF Regulations and circulars issued thereunder in the format as specified.
  2. In case of the AIF is a trust, the CTR shall be submitted to the trustee and sponsor within 30 days from the end of the financial year. In the case of other AIFs, the CTR shall be submitted to the sponsor within 30 days from the end of the financial year.
  3. In case of any observations/comments on the CTR, the trustee/sponsor shall intimate the same to the manager within 30 days from the receipt of the CTR. Within 15 days from the date of receipt of such observations/comments, the manager shall make necessary changes in the CTR, as may be required, and submit its reply to the trustee/sponsor.
  4. In case any violation of AIF Regulations or circulars issued thereunder is observed by the trustee/sponsor, the same shall be intimated to SEBI as soon as possible.

Apart from the aforementioned reporting requirements, Category III AIFs have to comply with certain other reporting and compliance norms.

Risk Management and Compliance requirements for Category III AIFs employing leverage

Category III AIFs that employ leverage have to comply with the following risk management requirements:

  1. The AIF should have a comprehensive risk management framework along with an independent risk management function which shall be appropriate to the size, complexity and risk profile of the fund.
  2. Presence of a strong and independent compliance function appropriate to the size, complexity and risk profile of the fund. The same shall be supported by sound and controlled operations and infrastructure, adequate resources and checks and balances in operations.
  3. Appropriate records of the trades/transactions performed shall be maintained and such information should be available to SEBI, whenever sought.
  4. Full disclosure and transparency about conflicts of interest should be made to the investors. Further, how such conflicts are managed from time to time shall also be disclosed in accordance with Regulation 21 of the AIF Regulations and any other guidelines as may be specified by SEBI from time to time. The details of such conflicts shall be disclosed to the investors in the placement memorandum and by separate correspondences as and when such conflicts arise. Such information shall also be disclosed to SEBI as and when required by SEBI.

Redemption Norms for open-ended Category III AIFs

  1. The Manager of these AIFs should ensure that there is a sufficient degree of liquidity of the scheme/ fund so that it meets redemption obligations and other liabilities.
  2. The Manager shall establish, implement and maintain a liquidity management policy and process so that the liquidity of the various underlying assets is consistent with the overall liquidity profile of the fund/scheme while making any investment.
  3. The Manager shall disclose any possibility of suspension of redemptions to the investors in the placement memorandum
  4. Suspension of redemptions shall be justified by the Manager only if such suspension is in the best interest of the investors of the AIF or if such suspension is required under the AIF regulations or SEBI
  5. Operational capability shall be built by the Managers of such AIF so that redemption can be suspended in an efficient manner. No new subscriptions shall be accepted during the suspension of redemptions.
  6. The Manager shall communicate to SEBI the decision of suspension along with the reason for such suspension and the same shall be appropriately documented.
  7. The Manager shall review the suspension regularly and take all necessary steps to resume operations in the best interest of the investors.
  8. It shall be the duty of the Manager to keep the SEBI informed about the actions undertaken throughout the suspension and also the decision to resume normal operations.

Category III AIFs undertaking leverage shall have to comply with the prudential requirements (calculation of leverage, total exposure, etc) as laid down in the Circular.

Compliance requirements in case of breach of leverage limits for Category III AIFs

Category III AIFs shall ensure that adequate systems are in place to monitor their exposure so that the leverage does not exceed at any time beyond the prescribed limits. The AIF shall report to the custodian on a daily basis the amount of leverage at the end of the day (based on closing prices) and whether there has been any breach of limit. Such reporting shall be done by the end of the next working day (as per Circular No. CIR/IMD/DF/14/2014 dated 19 June 2014).

Reporting requirements in case of breach of limit:

  1. AIF shall send a report to the custodian in case of any breach of limit. The custodian shall report to SEBI providing a name of the fund, the extent of breach and reasons for the same before 10 A.M. on the next working day.
  2. A report shall be sent to all the clients stating that there has been a breach in the limit along with reason, before 10 A.M. of the next working day
  3. The AIF shall square off the excess exposure and bring back the leverage within the prescribed limit by end of next working day. However, an action may be taken by SEBI against the AIF under SEBI (Alternative Investment Funds) Regulations, 2012 or the SEBI Act.
  4. A confirmation of squaring off of the excess exposure shall be sent to SEBI by the custodian by end of the day on which the exposure was squared off.

Author: Ms. Alivia Das

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


Issuance of Equity and Preference Shares with Differential Rights and Variation of Rights


The term differential rights with respect to shares can be interpreted to mean the existence of rights different in nature than the rights that are inherently associated with ordinary shares. The holder of these shares has rights which are different from the holder of ordinary shares. Differential Rights in association with shares are in relation to voting rights, dividend or otherwise.

Issuance of shares with differential rights may be used as a tool for strategizing control and dilution of voting rights in a company.

Shares with Differential Rights under the Companies Act, 2013

Section 43(a) of the Companies Act, 2013 provides for the issue of equity shares having differential rights in accordance with Rule 4 of the Companies (Share Capital and Debentures) Rules, 2014. Rule 4(1) of the Companies (Share Capital and Debentures) Rules, 2014 stipulates that a company limited by shares can issue equity shares with differential rights as to dividend, voting or otherwise, only if such issue of shares meet the following conditions:

  • The issue should be authorised by the articles of association;
  • The issue should be authorised by the shareholders of the Company by way of an ordinary resolution; (issue of such shares of a listed company shall be approved by shareholders through postal ballot)
  • The shares with differential rights shall not exceed twenty-six percent of the total post-issue paid up equity share capital including equity shares with differential rights issued at any point of time;
  • The company should have a consistent track record of distributable profits for the last three years;
  • The company has not defaulted in filing financial statements and annual returns for three financial years immediately preceding the financial year in which it is decided to issue such shares;
  • the company has no subsisting default in the payment:
  1. a declared dividend to its shareholders or
  2. repayment of its matured deposits or
  3. redemption of its preference shares or debentures that have become due for redemption or
  4. Payment of interest on deposits or debentures
  • The Company should not have defaulted on:
  1. Repayment of loans from banks and public financial institutions or interest thereon
  2. Payment of dividend on preference shares
  3. Payment of statutory dues for employees
  4. Depositing moneys into the Investor Education and Protection Fund.

However, a company may issue equity shares with differential rights upon expiry of five years from the end of the financial year in which such default was made good.

  • The Company should not have been penalized by any Court or Tribunal during the last 3 years of any offence under RBI, SEBI, SCRA, FEMA or any other special Act, under which such companies being regulated by sectoral regulators.

Additionally, the notice of the general meeting for issuing equity shares with differential rights shall contain particulars in the explanatory statement as provided in Rule 4(2) of the Companies (Share Capital and Debentures) Rules, 2014.

Private companies have been exempted from the applicability under Section 43 vide a Ministry of Corporate Affairs Notification G.S.R 464 (E) dated June 5, 2015. As Section 43 is read in accordance with Rule 4 of the Companies (Share Capital and Debentures) Rules, 2014, the said rule shall also not be applicable to private companies.

However, the question still remains whether private companies are at a full liberty to structure their share capital as they are not required to comply with Section 43 of the Companies Act, 2013.

Differential Voting Rights

Voting Rights of Holders of Compulsorily Convertible Preference Shares

As per Section 47(2) of the Companies Act, 2013, a holder of compulsorily convertible preference shares shall vote only on those resolutions:

  • That directly affects the rights attached to his preference shares
  • For winding up of the Company.
  • For repayment or reduction of its equity or preference share capital.

However, a holder of compulsorily convertible preference shares is eligible to vote on all resolutions placed before the Company in case the Company fails in paying the dividend in respect if those preference shares, for a period of two years or more. Private companies are exempted from complying with Section 47, where memorandum or articles of association of the private company so provides.

If a Company has issued multiple classes of preference shares, the variation of rights (voting and dividend) of such classes of preference shareholders would be as prescribed by Section 48 which applies to both public and private companies. For the variation of rights for different classes of preference shareholders, a special resolution is required to be passed by the said class of shareholders for which the rights are to be varied.

Therefore, a Company may have different classes of preference shareholders having voting rights different from the voting rights available to ordinary class of preference shareholders.

Voting Rights of Holders of Equity Shares

Under Section 47(1) of the Companies Act, 2013, in regard to voting rights, it has been stated that:

  1. Every member of a company limited by shares and holding equity share capital therein, shall have a right to vote on every resolution placed before the company; and
  2. His voting right on a poll shall be in proportion to his share in the paid-up equity share capital of the company.

As mentioned earlier, Section 43 provides for issuing equity shares with differential rights which includes but is not limited to differential rights as to voting.

In case a Company has multiple classes of equity shareholders, the variation of rights (voting and dividend) of such classes of shareholders would be as prescribed by Section 48 which applies to both public and private companies.

In a recent change, the Government of India has come up with a draft ecommerce policy wherein it suggests that there should be differential voting rights in order to give Indian founders with minority stakes more control over the Company.


Shares with differential rights may have rights that are secondary to those attached to ordinary equity shares. Thus, these enable promoters to have control of the company. An investor investing funds into a company may also want beneficial voting rights (along with preference shareholding), in order to ensure that the company utilises the supplied funds judiciously and honour all obligations undertaken in the transaction documents. This can be achieved by way of shares issued to them having differential rights. Hence, the transaction documents of such issuance and subscription of the shares with differential rights must include the available rights (e.g. reserved matters) to the investor and detail the manner of exercise of such rights.

Authors: Mr Spandan Saxena Ms Alivia Das.

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