Jurisdiction - India
India – Corporate & SCRA September Review.

23 October, 2013



The Companies Act, 2013 (‘2013 Act’), which will replace the Companies Act, 1956 (‘1956 Act’) in a phased manner, received Presidential assent on August 29, 2013, and was published in the Official Gazette on August 30, 2013, with only Section 1 of the 2013 Act being notified (which deals with the title, extent of operation and applicability of the 2013 Act). The Ministry of Corporate Affairs, Government of India (‘MCA’) has subsequently notified 98 Sections of the 2013 Act, which have taken effect from September 12, 2013. By a subsequent clarification issued by MCA on September 18, 2013, the relevant Sections of the 1956 Act, which correspond to the notified Sections (although the specific repealed Sections of the 1956 Act have not been listed out by the Government), have ceased to have effect from September 12, 2013. Apart from the Sections of the 1956 Act that have been repealed by the aforesaid clarification, all other provisions under the 1956 Act continue to be in force.

Some of the key provisions of the 2013 Act that have been notified, and are effective as of
date, include inter alia:

i. Provisions relating to public offers. Notably, however, provisions relating to private placement are yet to be notified.

ii. Section 58(2) of the 2013 Act, which provides that a contract or arrangement between two or more persons in respect of the transfer of securities of a public company is now enforceable as a contract. This, therefore, lays to rest company law concerns (as existing under the 1956 Act) with regard to the enforceability of share transfer restrictions in a public company. Also, please refer to the write up “Notification under the Securities Contract (Regulation) Act, 1956” below, which sets out the position on enforceability of put/call options in relation to the shares of public companies.

iii. Section 180 of the 2013 Act (corresponding to Section 293 of the 1956 Act), which restricts the ability of the board of directors of a company to undertake certain acts without the prior approval of the shareholders by way of a special resolution, including inter alia disposing of the whole or substantially the whole of the undertaking of the company, making investments, borrowing money etc. The significant differences between Section 180 and the corresponding law under the 1956 Act are that: (i) the provisions of this Section are now applicable to all companies and not just public companies; and (ii) the threshold of shareholders’ approval for the prescribed actions has been raised from an ordinary resolution to a special resolution. Further, unlike the corresponding Section in the 1956 Act, this Section has defined an “undertaking” and “substantially the whole of the undertaking”. However, in doing so, while the 2013 Act does specify thresholds of income and investment in an “undertaking”, it fails to clarify what would constitute an “undertaking”.

iv. Section 185 of the 2013 Act (corresponding to Section 295 of the 1956 Act) governing loans to directors (and any person in whom such director is interested). Pursuant to this provision, loans/ guarantees by a company to its directors/ persons in whom such directors are interested have been prohibited (unless otherwise permitted by the 2013 Act). What is significant about this Section, when compared with the existing law is that (i) the provisions have now been made applicable to all companies and not just public companies; and (ii) existing exemptions with regard to loans/ guarantees from a holding company to/ in relation to a wholly owned subsidiary have been removed. This effectively means that a holding company may not be able to provide a loan to/ a guarantee in relation to the indebtedness of a wholly owned subsidiary where there is, for instance, any common director on the board of directors of such entities, which is very likely in group structures. It remains to be seen whether this provision will be clarified/ relaxed by way of rules.

v. Section 192 of the 2013 Act, which places a restriction on non-cash transactions involving directors. Under this provision, no company is permitted to enter into an arrangement by which a director of the company or its holding, subsidiary or associate company or a person connected with him or the company acquires or is to acquire assets for consideration other than cash, from the company or such director respectively, except with prior shareholder approval for such arrangement.

vi. The following new provisions dealing with the prohibition on forward dealings and
prohibition on insider trading:


  • Pursuant to Section 194, directors and key managerial personnel are prohibited from buying, in a company, its holding company, subsidiary or associate company, a right to call for, or a right, as they may elect, to call for delivery, or a right to make delivery at a specified price and within a specified time, of a specified number of relevant shares or a specified amount of relevant debentures.
  • Pursuant to Section 195, insider trading in securities has been prohibited in all companies, and not just with regard to listed companies, which is quite unusual. The Section extends in particular to insider trading by directors/ key managerial personnel, and defines the term “insider trading”. It is not clear how this will impact the ability of promoter directors to deal with shares held by them, and/or the status of stock options held by directors/key managerial personnel. It may be noted that pursuant to Section 458 of the 2013 Act, the power to enforce Sections 194 and 195 with regard to listed companies has been delegated to the Securities and Exchange Board of India (‘SEBI’).


vii. Section 447, which defines “fraud” extremely broadly. Any “officer who is in default”, which will include directors and key managerial personnel, could be held liable for fraud. The punishment prescribed in relation to a fraudulent act is imprisonment for a period ranging from six months to 10 years, and a fine being not less than the amount involved in the fraud, but extending up to three times the amount involved in such fraud.

viii. A number of Sections giving the Central Government the power to constitute bodies, including the National Company Law Tribunal (‘Tribunal’), and to specify rules in relation thereto have been notified.

MCA has clarified that until a date is notified by the Central Government under Section 434 of the 2013 Act, for transfer of all matters, proceedings or cases to the Tribunal, the Board of the Company Law Administration will exercise the powers of the Tribunal under Sections 24, 58 and 59 of the 2013 Act.

Several provisions of the 2013 Act require drafting and notification of rules in relation thereto. In this regard, the Central Government has published two tranches of draft rules, as well as draft forms corresponding to various provisions of the 2013 Act. Stakeholders have been provided with time up to October 8, 2013 and October 19, 2013 (respectively) to provide comments/suggestions on these draft rules.



On October 3, 2013, SEBI issued a notification under Sections 16 and 28 of the Securities Contracts (Regulation) Act, 1956 (‘SCRA’), permitting the entering into of the following types of contracts:  (a) spot delivery contracts; (b) contracts for sale or purchase of securities or contracts in derivatives, as permissible under SCRA, the SEBI Act, 1992 (‘SEBI Act’) and the rules and regulations made under such statutes; and rules, as well as the regulations and bye-laws of a recognised stock exchange; (c) contracts for pre-emption, including right of first refusal, tag-along or dragalong rights contained in the shareholders agreements or articles of association of companies; and (d) contracts containing an option for purchase or sale of securities. Any other contracts for the sale or purchase of securities may be entered into, only with the prior approval of SEBI.

In particular, contracts containing an option for purchase or sale of securities (i.e., a “put” option or a “call” option) are permissible, subject to satisfaction of the following conditions:

i. the title and ownership of the underlying securities are held continuously by the selling party to such a contract for a minimum period of one year from the date of entering into the contract;
ii. the price or consideration payable for the sale or purchase of the underlying securities, pursuant to the exercise of any option contained therein, is in compliance with all the laws for the time being in force, as applicable; and
iii. the contract has to be settled by way of actual delivery of the underlying securities.

This notification clarifies that it does not affect or validate any contract entered into prior to October 3, 2013. The SEBI notification further rescinds the notification dated March 1, 2000 (except with respect to things done or omitted to be done prior to such rescission), by which only: (a) spot delivery contracts; and (b) contracts for cash or hand delivery or special delivery or contract in derivatives as permissible under SCRA or the SEBI Act and rules and regulations made under such statues; and rules, regulations and bye-laws of a recognised stock exchange could be entered into without the prior consent of SEBI. This notification, therefore, puts to rest issues pertaining to the enforceability of put options and call options with respect to such options entered into on or after October 3, 2013.




For further information, please contact:


Zia Mody, AZB & Partners
[email protected]


Abhijit Joshi, AZB & Partners 
[email protected]

Shuva Mandal, AZB & Partners 

[email protected]


Samir Gandhi, AZB & Partners
[email protected]

Percy Billimoria, AZB & Partners 

[email protected]


Aditya Bhat, AZB & Partners 
[email protected]

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