Tag Archives: the companies act

KBase – The Quarterly Newsletter from NovoJuris, June 2014

Business Gateway – Israel and India

By Sharda Balaji, Founder, NovoJuris

This May 2014, I attended the Israel Innovation Conference, at Tel Aviv, an event focused on Bio-Med and Hi-Tech. Having experienced Israel’s innovation capabilities from close quarters, from working with Israeli clients in NovoJuris and earlier, while I was working with Intel;  to being amidst the entrepreneurs and innovators, the energy is palpable.
Israel – Is Real.

This was my first trip and I interacted with the government, universities, accelerators, investors and of course, startups and founders. The discussion points hovered around business partnerships between India and Israel, R&D, commercializable IP and evolved startup ecosystem.
Israel is known as a startup nation and has the highest gross expenditure on R&D, largest number of companies listed on NASDAQ outside of North America, highest level of venture capital as share of GDP, 1 startup for every 1500 people, 38 accelerators in a country, which perhaps is as big as Kerala. The government not only spends on R &D but has various active programs to support and fund commercialization. I found that aspect of making the R & D spend “matter”, fascinating.

Building blocks of innovation.

  • ‘Most universities have very active entrepreneurship centers,’ says Mr. Oren Simanian, Founder of StarTau, TelAviv University. If the Tata Group has to grow from a  $3bn to a $5bn organization, then the answer is innovation. This holds true for an organization and a country. Innovation is a major driver of productivity, economic growth and development. It is a part of the country’s academics. Tel Aviv University has about 15000 patents, of which 35% is commercializable, according to a group of Indian scientists who visited the university. Tata Group has recently given a grant of $5mn to Tel Aviv University.
  • The Office of the Chief Scientist, Ministry of Economy, has numerous programs, which I think have been a major catalyst in Israel becoming a key centre for high tech entrepreneurship. A variety of support programs, handled by MATIMOP, have contributed to this – including providing matching grants, soft-loans  and the like, to enable research and development and its commercialization.  As information, the Govt of Karnataka recently entered into a MOU for R & D Co-operation, Karnataka-Israel R&D Cooperation Program-KIRDand the finer details of the program are being worked out says Ms. Hadas Kroituru the Program Manager for Asia-Pacific, MATIMOP.
Founders DNA
  • All 18 year olds have to serve the army. This gives every young person an incredible experience of leadership, discipline, a very high sense of risk taking ability, ‘getting it done – no matter what’ attitude, the ability to think solutions and very fast. Perhaps, it is because of this that nearly everyone knows everyone or there is just one degree of separation to get connected amongst the Israelis.
  • Compared to the life-risks faced in a battle-field (and this nation does not have a friendly neighborhood), the risks of starting a venture seem small.
  • Failure is just another outcome to start again.

The Eco-system.

38 accelerators and incubators, 17 co-working spaces, nearly 10 startup events a day, highest ratio of Investment to startups, in the world. Add to that – the communities and R & D centres, and the eco-system has massive momentum and energy. Here is what Nivcalder, Founder of a stealth-mode startup, has to say.

I heard one of the most positive speeches about India in the recent times, by Mr. Jaideep Sarkar, Ambassador of India to Israel.
With the governments of the two countries working so closely, I am upbeat that business between the countries is poised for growth.
It is interesting to know that nearly every Israeli has a ‘visit to India’ on their bucket-list.
At NovoJuris, we have been doing a lot of work with Israeli companies. You can always reach out to us to know more.

The Companies Act 2013 Update

The Companies Act, 2013 has brought in many changes. We have discussed many provisions, as applicable to private limited companies and fund raising, on our blog.

Here are some that warrant a quick look  –

Employee Stock Option has become prescriptive. 
Fund raising, specially for early stage startups has become a bit more difficult.
Issue of shares to existing shareholders. 
One Person Company
Corporate Social Responsibility 
Various options to set up business

Showcasing some of our services:

Accelerators –  We help structure the program; get statutory clearances; set up the investment vehicles and work with the portfolio companies to enable the success of the program.

International Business gateways – We have experience in cross-border transactions between India and USA, Singapore and Israel. We help structure the business, legal entities, taxation, investment, various compliances including foreign exchange related compliances with RBI and other statutory authorities.

Prevention of Sexual Harassment : With Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 (POSH) being mandatory for all organisations, we help with structuring the policy, process, committees and training for the employees. We also handle reported cases of harassment.

Alternate Investment Funds, Category I – We help structure and set up the investment vehicles, SEBI registrations, support the investment side of the fund and work with the portfolio companies.

Interesting reads from our Twitterdom

  1. Non-compete clause will not be allowed for FDI in pharmaceutical sector, except in special circumstances with the approval of FIPB. 
  2. ECB can now be called for working capital requirements, which will require prior approval from RBI 
  3. Instead of multiple SEBI regulations for listing & disclosure requirements for equity & debt, SEBI has proposed a single umbrella document & is up for public comments.
  4. A director will have to attend at least 1 board meeting during past 12 months, failing which his office will automatically become vacant, even if leave of absence is given by Board.
  5. Conditions for  re-schedulement of ECB due to changes in draw-down schedule and / or repayment schedule have been simplified.
  6. Issues relating to dislisting have been addressed in SEBI Discussion Paper on ‘Review of Delisting Regulations’, which are up for public comments. 
  7. Provision of appointment of whole time Company Secretary in all companies having paid up share capital of Rs. 5 crores or more has been restored.
  8. Whistleblowers Protection Act, 2011 giving protection to people who expose corruption in government or irregularities by public functionaries has received consent from President Pranab Mukherjee
  9. Calling ECB has been made simpler, with shifting of approval authority from RBI to concerned Authorized Dealer Bank.
  10. Limit for resident individuals has been increased from USD 75,000 per financial year to USD 125,000 with immediate effect,  under Liberalised Remittance Scheme

Clarifications on appointment of Independent Directors under Companies Act, 2013.

With some open questions left on appointment of independent directors under the new Act, Ministry of Corporate Affairs has issued some clarifications on representations being made to it from various Industry Chambers, Professional Institutes. The clarifications are as follows:

  1. Pecuniary Relationship– The Act provides that an independent director should not have any pecuniary relationship with the Company, its holding, subsidiary or associate company, or their promoters, or directors. In this context, it is clarified that any transaction in the ordinary course of business at arm’s length price will not be said to have pecuniary relationship.

Further, any sitting fees drawn by the director, reimbursement of expenses for participation in the Board and other meetings and profit related commission approved the members according will also be outside the scope of pecuniary relationship.

  1. Re-appointment of existing Independent Directors– All the existing independent directors will have to be re-appointed as independent directors in light of Section149(11) of the Act, which provides that “any tenure of an independent director on the date of commencement of this Act shall not be counted as a term under the new Act”. The same should be done by the concerned companies within the transitionary period of 1 year from the notification of rules. The rules got notified in Official Gazette on 2  April 2014.
  1. Appointment of Independent Director for less than 5 years: It is clarified that although the Act provides for a maximum tenure of 5 consecutive years in 1 term, companies may appoint independent director for a period lesser than 5 years. Further the Act provides that an independent director can hold 2 consecutive terms of 5 years each and can be re-appointed only after the cooling off period of 3 years. To illustrate this with an example, an independent director can be appointed for 2 consecutive terms of 2 years each and although the total tenure would be less than 10 years, the director can be re-appointed only after the cooling off period of 3 years.

All the listed and prescribed companies should take note of the above.

Author : Geetika Chandel –Associate at NovoJuris. 

Disclaimer : This is not a legal opinion and should not be construed as one. Please speak with your attorney for any advice.

How to choose your legal avatar?

With the new Companies Act 2013 introducing One Person Company, we thought of doing a refresh of our earlier comparative chart.

 

SL. NO. FEATURES ONE PERSON COMPANY (OPC) PRIVATE LIMITED COMPANY LIMITED LIABILITY PARTNERSHIP (LLP) SOLE PROPRIETORY PARTNERSHIP FIRM
  1.  
Legality It is a separate legal entity It is a separate legal entity It is a separate legal entity Not a separate legal entity Not a separate legal entity
Governed by Companies Act 2013 Companies Act 2013 Limited Liability Partnership Act 2008 NA Indian Partnership Act 1932
  1.  
Registration Has to be registered with ROC. Certificate of Incorporation is issued by ROC Has to be registered with ROC. Certificate of Incorporation & Certificate of Commencement of Business is issued by ROC

 

Has to be registered with ROC. Certificate of Incorporation is issued by ROC  There is no process of registration as it is not a separate legal entity Not mandatory. Unregistered Partnership Firm will not have the ability to sue.
  1.  
Name “One Person Company” shall be mentioned in brackets below the name of such company Name of a private company to end with the words “Private Limited” Name to end with “LLP” Limited Liability Partnership” No guidelines No guidelines
  1.  
Capital Contribution Minimum authorised and paid up capital is Rs. 1,00,000/- Minimum authorised and paid up capital is Rs. 1,00,000/-

 

No limit prescribed in the Act No guidelines No guidelines
  1.  
Minimum number of Directors/Partners 1 Director who has to be a Resident of India 2 Directors out of which 1 director has to be a resident of India

 

2 Designated Partners out of which 1 director has to be a resident of India No guidelines 2 Partners
  1.  
Minimum number of shareholders/members 1 shareholder who has to be a Resident of India. He has to appoint a Nominee in case of his death or incapacity to contract

 

Minimum 2 shareholders. Can be Body Corporates & foreign nationals also NA NA NA
  1.  
Minimum number of Meetings including Board & General Meetings At least 1 Board meeting in each half year and the gap between 2 meetings should not be less than 90 days. However, no Board Meeting required, if there is only one director. No requirement of AGM.

 

At least 4 Board Meetings, one in each quarter & the gap between 2 meetings should not be more than 120 days. AGM to be held within 6 months from closure of Accounts. No specified limits NA NA
Annual Filings Financial Statements and Annual Return to be filed with ROC Annual Accounts and Annual Return to be filed with ROC Annual Statement Of Accounts And Solvency & Annual Return has to be filed with ROC NA NA
10. Audit Compulsory, irrespective of share capital and turnover Compulsory, irrespective of share capital and turnover Required, if the contribution is above Rs.25,00,000/- or if annual turnover is above Rs. 40,00,000/- NA Compulsory
11. Foreign Nationals as shareholders/ Partners NA – Has to be a Resident of India Foreign nationals can be shareholders, however there are separate RBI guidelines to be followed Foreign nationals can be partners, however there are separate RBI guidelines to be followed NA Foreign nationals cannot form partnership firm.
12. Taxability No amendment made in the Income Tax Act yet. But may be treated like pvt ltd. The income is taxed at 30% + surcharge + cess (Surcharge rates will vary)  The income is taxed at 30% +  surcharge+ cess (Surchage rates will vary) As per tax slabs applicable to personal income The income is taxed at 30% + surcharge+ cess (surcharge rates will vary)
 13. Liability Limited Liability Limited liability Limited liability Unlimited Liability Unlimited, can extend to the personal assets of the partners
14. Conversion Can be converted into a public/private Company Can be converted into a Public Company/LLP Cannot be converted into a Private Company/Public company/OPC NA Can be converted to a Private Company
15. Dissolution Not prescribed – To follow the same as for Private Limited Company Very procedural & time consuming. Voluntary Winding up under FTE/ by Order of National Company Law Tribunal Less procedural compared to Company. Voluntary/ by Order of National Company Law Tribunal NA By agreement of the partners, insolvency or by Court Order

Article by Pooja Shah, Associate with NovoJuris.

Disclaimer: This is a generic note. Please consult your lawyer.

Issue of sweat equity shares for a private company – Companies Act, 2013.

Issue of sweat equity shares for a private company used to be regulated by Section 79A and Unlisted Companies (Issue of Sweat Equity Shares) Rules, 2003 under Companies Act, 1956. Now the same is regulated by Section 54 and Chapter 4 under Companies Act, 2013.
“Sweat equity shares” means such equity shares, which are issued by a Company to its directors or employees at a discount or for consideration, other than cash, for providing their know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

se

Essentials of Sweat Equity:

Eligibility for Sweat-
a) Permanent employee of the Company who has been working in India or outside India, for at least last 1 year
b) Director of Company-Whole time director or not
c) An employee or a director as defined in sub-clauses (a) or (b) above of a subsidiary (in India or outside India) or of a holding Company.
Value Addition– Has been defined. It means actual or anticipated economic benefits derived or to be derived by Company from an expert or a professional for providing know-how or making available rights in the nature of intellectual property rights.
Authorisation by shareholders– Yes, prior shareholders approval through special resolution is required.
Time limit for issuing Sweat: Allotment of sweat equity shares shall be made within 12 months from the date of passing special resolution.
Time Gap– There should be at least 1 year between the commenced of business and issue of such shares.
Valuation– Valuation of sweat shares and intellectual property rights(IPR)/know how/ value additions shall be done by Registered Valuer.
Notice of General Meeting– Critical elements of Valuation Report shall be sent along with the Notice. Particulars like class of shares, price, consideration, principal terms of conditions, employees to whom sweat is proposed is required to be mentioned in explanatory statement.
Limit on sweat equity: In a year, sweat shares shall not exceed 15% of existing paid up equity share capital or shares having issue value of Rs. 5,00,00,000, whichever is higher. However, it should not exceed 25% of paid up equity capital of Company at any time.
Mandatory lock-in period- 3 years from the date of allotment. The fact that the share certificates are under lock-in and the period of expiry of lock in shall be mentioned in prominent manner on share certificate.
Manner of treatment of sweat issued for other than cash in Books of accounts-
a) If non-cash consideration takes the form of a depreciable or amortizable asset- Should be carried to the balance sheet according to accounting standards; or
b) In other cases- Shall be expensed as provided in the accounting standards.
Accounting value of sweat equity
a) If sweat equity shares are not issued for acquisition of an asset- Value shall be treated as a form of compensation to the employee or the director in the financial statements of the Company.
b) If sweat equity shares are issued for acquisition of an asset- the value of the asset, as determined by the valuation report, shall be carried in the balance sheet as per the Accounting Standards and such amount of the accounting value of the sweat equity shares that is in excess of the value of the asset acquired, as per the valuation report, shall be treated as a form of compensation to the employee or the director in the financial statements of the company
Rights/limitations/restrictions applicable on sweat equity shares- Shall rank pari passu with other equity shareholders.
Disclosure in Directors Report- Particulars like class of director or employee, class of shares, number of sweat equity shares, percentage of sweat equity shares in total post issued and paid up share capital, diluted Earnings Per Share, consideration received.
Register of Sweat Equity Shares– Details of sweat shares shall be mentioned in this Register. Shall be maintained at Registered Office or such other place as the Board may decide. Entries shall be authenticated by CS of the Company or by any other person authorized by Board.

Author : Geetika Chandel – a Company Secretary; manages Compliances at NovoJuris. She loves making graffitis.

Disclaimer: This is not a legal opinion and should not be construed as one. Please speak with your attorney for any advice.

Issuing of Shares with Differential Rights, Companies Act 2013

Issuing shares with differential rights has become more prescriptive and restrictive  in Companies Act, 2013.New startups may  find it difficult to meet  the precondition of  consistent track record of distributable profits for last 3 years.

Voting Rights when there are Shares with Differential Voting Rights

There are a few subtle changes in the Companies Act, which bring about challenges in voting rights for different classes of shares and still be able to meet the requirement of balance of equity : preference in total voting rights.

Earlier to the Companies Act 2013 (Act), private companies could determine voting rights of equity(including differential rights) and preference shareholders as per their convenience, because of the Saving section 90 of old Companies Act, 1956.

The Act now has increased the boundaries for voting rights for preference shares, which now includes any resolutions which directly affect the rights attached to preference class and any resolution for the winding up of the company or for the repayment or reduction of its equity or preference share capital.

 In private equity deals (angels, VC) who opt for preference shares as the instrument, then having a list of matters (called as Reserved Matters) which requires the preference shareholder voting, then the Act enables it.  However, the proviso describes that the  “proportion of the voting rights of equity shareholders to the voting rights of the preference shareholders shall be in the same proportion as the paid-up capital in respect of the equity shares bears to the paid-up capital in respect of the preference shares”. It looks like additional language is required to be captured in the shareholders agreement at the time of investment, to protect the affirmative consent by the investors.

 This balance (pro-rata of equity: preference) gets murky when there is a class of shares with differential voting rights.

 Shares with differential voting rights:

Any company, whether private or public, will now have to comply with the below requirements.

  • The shares have to be ‘equity’ class.
  • The company cannot convert its existing share capital to a differential voting class but has to be fresh issuance of shares.
  • Issuance requires prior shareholders approval through ordinary resolution and the Articles of Association shall authorize issue of such shares. Also, there is a limit that such shares that it should not exceed 26% of the total post-issue paid up equity share capital. Further the Company should not have defaulted in filing financial statements and annual returns for 3 financial years. The Company should not have any subsisting default in the payment of

–  a declared dividend to its shareholders or

–  repayment of its matured deposits or

–  redemption of its preference shares or debentures that have become due for     redemption or

–  Payment of interest on deposits or debentures

  • Besides this, the Rules require that the Company should not have defaulted on

–  Repayment of loans from banks and public financial institutions or interest thereon

–  Payment of dividend on preference shares

–  Payment of statutory dues for employees

–  Depositing moneys into the Investor Education and Protection Fund.

(Our comment: Would an earlier default now made good still be considered as default under this clause, given there is a separate clause on “subsisting default”? )

  • The Company should also not have been penalized by 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.
  • Disclosure of relevant details in the shareholder notice, like, total number of such shares to be issued, details of the differential rights, percentage of shares with differential rights to the total post issue paid up equity share capital, reasons or justification for the issue; price at which such shares are proposed to be issued either at par or at premium; basis on which the price has been arrived at, change in control(if any) and other details in Explanatory Statement and Director’s Report is required by Companies (Share Capital and Debentures) Rules, 2014.

Disclaimer: There are many details that the Act prescribes, please speak with your attorney for advice. This is not a legal opinion and should not be construed as one.

Criminal Liabilities of Directors under the Companies Act 2013

 

Companies Act 2013 has increased monetary penalties and imprisonment. The civil and criminal liabilities are not just on directors but includes “Officers in Default”.   There is heightened corporate governance requirements even for  startups and unlisted companies,  even though there is no public money invested.

While sections which require monetary penalties can be compounded before the statutory authorities, sections which details imprisonment cannot be compounded. Entrepreneurs should also note that such penalties are not limited by the “limited liability” concept. We urge the entrepreneurs to give importance to corporate governance.

liability

“Officer in default” would broadly cover whole-time directors, Key Managerial Personnel (KMP) and such other directors as specified by the Board in the absence of KMP and every director who is aware of contravention of law by virtue of receipt of board proceedings or participation therein without raising any objection or where non-compliance has taken place with his consent or connivance.

Below table is indicative of some of the sections which deal with imprisonment.

Section Who is liable and the Civil/Criminal liability involved
53- Prohibition on issue of shares at discount
  • Company-Fine- Not less than Rs. 1 lakh and may extend to Rs. 5 lakhs
  • Officer in default- Maximum imprisonment of 6 months or Fine- Not less than Rs. 1 lakh and may extend to Rs. 5 lakhs or with both.
68(11)- Power of Company to purchase its own securities
  • Company-Fine- Not less than Rs. 1 lakh and may extend to Rs. 3 lakhs
  • Officer in default- Maximum imprisonment of 3 years or Fine- Not less than Rs. 1 lakh and may extend to Rs. 3 lakhs or with both.
71(11)- Debentures
  • Officer in default- Maximum imprisonment of 3 years or Fine- Not less than Rs. 2 lakh and may extend to Rs. 5 lakhs or with both.
92(5)- Annual return
  • Company-Fine- Not less than Rs. 50,000 Thousand and may extend to Rs. 5 lakhs
  • Officer in default- Maximum imprisonment of six months or Fine- Not less than Rs. 50,000 Thousand and may extend to Rs. 5 lakhs or with both.
118(12)- Minutes of proceedings of general meeting, meeting of Board of Directors and other meeting and resolutions passed by postal ballot.
  • Any person found guilty of tampering with the minutes- Maximum imprisonment for 2 years and Fine- Not less than Rs. 25,000 but which may extend to Rs. 1 lakh
128(6)- Books of account, etc., to be kept by Company
  • Officer in default- Maximum imprisonment of 1 year or Fine- Not less than Rs. 50,000 and may extend to Rs. 5 lakhs or with both.
129(7)- Financial statement
  • Officer in default- Maximum imprisonment of 1 year or Fine- Not less than Rs. 50,000 and may extend to Rs. 5 lakhs or with both.
134- Financial statement, Board’s report, etc
  • Company-Fine- Not less than Rs. 50,000 and may extend to Rs.25 lakhs
  • Officer in default- Maximum imprisonment of 3 years or Fine- Not less than Rs. 50,000 and may extend to Rs. 5 lakhs or with both.
167- Vacation of office of director
  • Director – Maximum imprisonment for 1 year or Fine- Not be less than Rs. 1 lakh  and may extend to Rs. 5 lakhs or with both.
185(2)- Loan to directors, etc.
  • Company-Fine- Not less than Rs. 5 lakhs and may extend to Rs.25 lakhs
  • Officer in default- Maximum imprisonment of 6 months or Fine- Not less than Rs. 5 lakhs and may extend to Rs. 25 lakhs or with both.
186(13) Loan and investment by Company
  • Company-Fine- Not less than Rs.25,000 and may extend to Rs. 5 lakhs
  • Officer in default- Maximum imprisonment of 2 years or Fine- Not less than Rs. 25,000  and may extend to Rs. 1 lakh or with both.
188(5)- Related party transactions
  • In case of unlisted Company, be punishable with fine which shall not be less than 25,000 rupees but which may extend to 5 lakh rupees
57- Punishment for personation of shareholder
  • Such person in default- Minimum 1 year to  Maximum 3 years imprisonment or Fine- Not less than Rs. 1 lakh and may extend to Rs. 5 lakhs.
58(6)- Refusal of registration and appeal against refusal
  • Such person in default- Minimum 1 year to  Maximum 3 years imprisonment or Fine- Not less than Rs. 1 lakh and may extend to Rs. 5 lakhs.
59(5)- Rectification of register of members
  • Company-Fine- Not less than Rs.1 lakh  and may extend to Rs.5 lakhs
  • Officer in default- Maximum imprisonment of 1 years or Fine- Not less than Rs. 1 lakh  and may extend to Rs. 3 lakhs or with both.
Chapter-IV- Registration of Charges
  • Company-Fine- Not less than Rs.1 lakh  and may extend to Rs.10 lakhs
  • Officer in default- Maximum imprisonment of six months or Fine- Not less than Rs. 25,000  and may extend to Rs. 1 lakh or with both.
137(3)- Copy of financial statement to be filed with Registrar
  • Company-Fine- Not less than Rs.1000 for  every day in default but not more than 10 lakhs
  • Officer in default- Maximum imprisonment of 6 months or Fine- Not less than Rs. 1 lakh  and may extend to Rs. 5 lakhs or with both.
182(4)- Prohibitions and restrictions regarding political contributions.
  • Company-Fine- 5 times of the amount of contribution in contravention
  • Officer in default- Maximum imprisonment of 6 months and Fine- 5 times of the amount of contribution in contravention
184(4)- Disclosure of interest by director
  • Such person in default- Minimum 1 year  imprisonment or Fine- Not less than Rs. 50,000 and may extend to Rs. 1 lakh or both.
187(4)- Investments of Company to be held in its own name
  • Company-Fine- Not less than Rs.25,000 and may extend to Rs.25 lakhs
  • Officer in default- Maximum imprisonment of 6 months or Fine- Not less than Rs. 25,000  and may extend to Rs. 1 lakh or with both
447- Punishment for fraud
  • Any person who is found to be guilty of fraud- Maximum imprisonment of 6 months may extend to 10 years
  • Such person also liable to fine which may extent to 3 times the amount involved.

Disclaimer:  There are many details that the Act prescribes, please speak with your attorney for advice. This is not a legal opinion and should not be construed as one.

Further issue of shares to existing shareholders – Rights Issue / Preferential basis

If the issuance of security is for a select group of people, called Private Placement, please refer to our post here.  If you wish to issue shares to existing equity shareholders, then read on.

When a company proposes to increase the share capital by issue of equity, convertible debentures (fully or partly), convertible preference shares to its existing equity shareholders, then companies (including private limited companies) have to comply with the new procedures laid out under Companies Act 2013. (Section 62 of Companies Act 2013 and Rule 13 of Companies (Share Capital and Debentures) Rules 2014 ).

sh

Preferential Offer means an issue of shares or other securities, by a Company to any select person or group of persons on a preferential basis and does not include shares or other securities offered through a public issue, rights issue, employee stock option scheme, employee stock purchase scheme or an issue of sweat equity shares or bonus shares or depository receipts issued in a country outside India or foreign securities.

ESOP, issuance of shares for consideration other than cash, sweat equity issuance has slightly different procedures and we would like to capture them in a separate post. Companies listed on the stock exchange have different processes from what are described below.

Essentials:

  • For a pro-rata issuance of equity and securities converting into equity, to current equity shareholders in the company, then the shareholders of the company has to approve through a special resolution, at least 3 days prior to such offer. The Articles of Association has to have an enabling provision.

– Since the Act specifies pro-rata, it further goes on to prescribe the timelines for                        acceptance or renouncing the offer and how the Board of Directors can deal with the                  renounced offers. 

  • If at the time of issuance of the convertible debentures or loan, the company had obtained a special resolution, then at the time of conversion to equity, there is no requirement of additional approval from shareholders.  However, as a transition into the new Act by private limited companies, then shareholder approval (Special resolution) at the time of conversion may have to be in place.

   – The price for the security offered has to be supported by a valuation report by a                          Registered Valuer.

  – The validity for such Special resolution is 12 months, within which the company has to               complete the allotments.

  – The securities allotted has to be fully paid-up (i.e. it cannot be partly-paid for).

  •  When obtaining the shareholder approval, the below details has to be decided and included in the disclosures:

–  the objects of the issue;

–  the total number of shares or other securities to be issued;

–  the price or price band at/within which the allotment is proposed;

 – basis on which the price has been arrived at along with report of the registered valuer;

–  relevant date with reference to which the price has been arrived at;

–  the class or classes of persons to whom the allotment is proposed to be made;

–  intention of promoters, directors or key managerial personnel to subscribe to the offer;

–  the proposed time within which the allotment shall be completed;

 – the names of the proposed allottees and the percentage of post preferential offer capital that may be held by them;

 – the change in control, if any, in the company that would occur consequent to the preferential offer;

 – the number of persons to whom allotment on preferential basis have already been made during the year, in terms of number of securities as well as price;

 – the justification for the allotment proposed to be made for consideration other than cash together with valuation report of the registered valuer.

– The pre issue and post issue shareholding pattern of the company.

If the offer is made for sweat or for other than cash, then there are other steps to be followed.

Author: Geetika Chandel, Associate at NovoJuris.

Disclaimer:  There are many details that the Act prescribes, please speak with your attorney for advice. This is not a legal opinion and should not be construed as one.