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India – Corporate & SCRA Updates.

29 April, 2014

 

 
  • The Ministry of Corporate Affairs (‘MCA’), by way of a circular dated April 1, 2014 (‘April 1 Circular’) has listed the notified sections of the Companies Act, 2013 (‘2013 Act’) and specified the corresponding sections of the Companies Act, 1956 (‘1956 Act’). The April 1 Circular also expressly stipulates the corresponding provisions of the 1956 Act that continue to remain in force in respect of each section of the 2013 Act that has been notified.

 

  • The 2013 Act, for the first time, introduced the definition of an “independent director” (‘ID’), which definition went above and beyond the existing definition under the equity listing agreement (which prohibited material pecuniary relationship) prohibiting any person from being an ID who has any pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters or directors, during the two immediately preceding financial years or the current financial year. By way of a circular dated June 9, 2014 (‘ID Circular’), MCA has clarified that:

 

i. Since Section 188 of the 2013 Act does not consider transactions that are conducted in the ordinary course of business and at an arms’ length within the purview of related party transactions, IDs are not said to have a pecuniary relationship in such cases; and

 

ii. The term “pecuniary relationship” does not include receipt of (a) sitting fees; (b) reimbursement of expenses for participating in meetings; and (c) profit related commission approved by the members of the company, in accordance with the provisions of the 2013 Act.

 

The ID Circular further clarifies that IDs appointed under the 1956 Act who intend to continue as IDs under the 2013 Act are required to be expressly appointed under the relevant provisions of Chapter IV of the 2013 Act, within one year from April 1, 2014, subject to compliance with eligibility and other prescribed conditions, including formalisation through a letter of appointment.

 

Section 149 of the 2013 Act requires IDs to hold office for a term of up to five consecutive years on the board of directors of a company, and IDs are eligible for reappointment for another term of up to five consecutive years, on passing of a special resolution by the company and disclosure of such appointment in the report of the board of directors. A cool-off period of three years is required between ceasing to hold office as an ID, and a subsequent appointment. The ID Circular has clarified that any term, whether of five years or less, is to be treated as one term for the provisions of the 2013 Act. Therefore, an ID would be required to vacate office after two consecutive terms (even if less than 10 years) and may be re-appointed only after the expiry of the requisite cooling off period of three years.

 

  • The Companies (Share Capital and Debentures) Rules, 2014 (‘Share Capital and Debenture Rules’) have been notified with effect from April 1, 2014. MCA, by way of its notification dated June 18, 2014, has made the following amendments to the Share Capital and Debentures Rules:

 

i. Equity shares with differential rights, issued by any company under the provisions of the 1956 Act and the rules made thereunder, will continue to be regulated under such provisions and rules (and not under the 2013 Act).

 

ii. For the purposes of the Share Capital and Debenture Rules, till a registered valuer is appointed in accordance with the provisions of the 2013 Act, it will be sufficient for the valuation report to be made by an independent merchant banker registered with the Securities and Exchange Board of India (‘SEBI’) or an independent chartered accountant in practice having a minimum experience of 10 years (‘Valuer’). The price of shares or other securities to be issued on preferential basis should not be less than the price determined on the basis of the valuation report of such Valuer.

 

iii. It has been provided that: (a) companies engaged in setting up of infrastructure projects; (b) “Infrastructure Finance Companies” registered with the Reserve Bank of India (‘RBI’); and (c) “Infrastructure Debt Fund Non-Banking Financial companies” registered with RBI, will be entitled to issue secured debentures for a period exceeding 10 years but not exceeding 30 years.

 

iv. Housing finance companies registered with the National Housing Bank are now required to create a debenture redemption reserve to the extent of 25% of the value of the debentures issued through public issue, but not in case of privately placed debentures.

 

  • MCA, by way of a circular dated June 18, 2014 (‘June 18 Circular’), has clarified the following with respect to Corporate Social Responsibility (‘CSR’):

 

i. The activities permissible for CSR spending set out in the 2013 Act must be interpreted liberally so as to capture the essence of the subjects enumerated in Schedule VII of the 2013 Act. The items enlisted therein, are broad-based and are intended to cover awide range of activities as illustratively mentioned in the June 18 Circular;

 

ii. One-off events such as marathons / awards / advertisements / sponsorships of TV programmes, etc., would not qualify as part of CSR expenditure.

 

iii. Expenses incurred by companies for the fulfillment of any act / statute of regulations (such as labour laws, land acquisition laws, etc.) would not count as CSR expenditure under the 2013 Act;

 

iv. Salaries paid by the companies to regular CSR staff as well as to volunteers of the companies (in proportion to company’s time / hours spent specifically on CSR) can be factored into CSR project cost as part of the CSR expenditure;

 

v. “Any financial year” referred under sub-section (1) of Section 135 of the Act read with Rule 3(2) of Companies (Corporate Social Responsibility) Rules, 2014 (‘CSR Rules’), implies “any of the three preceding financial years”;

 

vi. Expenditure incurred by a foreign holding company for CSR activities in India will qualify as CSR spend of the Indian subsidiary if, the CSR expenditures are routed through the Indian subsidiary and if the Indian subsidiary is required to do so as per Section 135 of the Act;

 

vii. “Registered Trust” (as referred in Rule 4(2) of the CSR Rules) would include trusts registered under the Income Tax Act 1961, for those States where registration of a trust is not mandatory; and

 

viii. Contribution to corpus of a trust / society / Section 8 company, etc., will qualify as CSR expenditure as long as: (a) the trust / society / Section 8 company, etc., is created exclusively for undertaking CSR activities; or (b) where the corpus is created exclusively for a purpose directly relatable to a subject covered in Schedule VII of the 2013 Act.

 

  • The 2013 Act does not contain a deeming provision similar to Section 4(7) of the 1956 Act. MCA, by way of a circular dated June 25, 2014, has clarified that an existing company, being a subsidiary of a company incorporated outside India, registered under the 1956 Act, either as a private company or a public company by virtue of Section 4(7) of the 1956 Act, will continue as a private company or public company as the case may be, without any change in the incorporation status of such company.

 

  • Section 149(3) of the Act stipulates that every company should have one director who has stayed in India for a period of 182 days in the previous calendar year. MCA, by way of a circular dated June 26, 2014 (‘June 26 Circular’), has clarified that the residency requirement will be reckoned from April 1, 2014, i.e., the date of commencement of Section 149. MCA has also clarified that the first “previous calendar year” for compliance with the provisions of Section 149 would be the calendar year 2014 and the period to be taken into account for compliance with the provsions of Section 149 will be the period from April 1, 2014 to December 31, 2014. Accordingly, on a proportionate basis, at least one director should have stayed in India for a period of 136 days, to satisfy the residency criteria. The June 26 Circular further clarifies that companies incorporated between April 1, 2014 and September 30, 2014 should have a resident director either at the incorporation stage or within six months of their incorporation. Companies incorporated after September 30, 2014 will, however, be required to have a resident director from incorporation.

 

  • Section 2(76) of the 2013 Act defines the term “related party”, with reference to a company, to mean, inter alia, a public company in which a director or manager is a director or holds, along with his relatives, more than 2% of its paid-up share capital. MCA, by way of the Companies 1st (Removal of Difficulties) Order, 2014, has clarified that a public company in which a director or manager is a director and holds along with his relatives, more than 2% of its paid up share capital will be considered a related party.

 

  • Provisions of the 2013 Act relating to financial statements (and documents required to be attached thereto), auditors’ report and the board of directors’ report (‘Financials’) have been brought into effect from April 1, 2014. A clarification was subsequently sought from MCA with regard to the relevant financial year with effect from which such provisions of the 2013 Act would be applicable.

 

MCA, by way of a circular dated April 4, 2014, clarified that all Financials in respect of the financial years that commenced prior to April 1, 2014 will be governed by the relevant provisions / schedules / rules of the 1956 Act, and the provisions of the 2013 Act will apply in respect of the financial years commencing on or after April 1, 2014.

 

  • The Companies (Meetings of Board and its Powers) Rules, 2014 notified with effect from April 1, 2014 (‘Meetings Rules’) mandatorily requires listed companies and the following classes of companies to have an audit committee and a nomination and remuneration committee (collectively, ‘Audit and Remuneration Committees’) of their board of directors:

 

i. Public companies with a paid-up share capital of INR 10 crore or more;

 

ii. Public companies with a turnover of INR 100 crore or more;

 

iii. Public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding INR 50 crore (collectively, ‘Eligible Public Companies’).

 

Audit and Remuneration Committees are mandatorily required to have IDs as members, with Section 149 of the 2013 Act providing a transitory period of one year from April 1, 2014 for enforcement of the same.

 

By a notification dated June 12, 2014, the Meetings Rules have been amended such that all Eligible Public Companies are now required to constitute Audit and Remuneration Committees within a period of one year from April 1, 2014 or up to the date of actual appointment of IDs on their board, whichever is earlier.

 

  • The 2013 Act and rules issued thereunder mandatorily require foreign nationals (intending to be directors, subscribers or promoters) to submit details of their permanent account number (‘PAN’) at the time of filing an application for incorporation.MCA, by way of two recent circulars, has clarified that any proposed director / subscriber / promoter (being a foreign national) is not required to compulsorily possess a PAN and may furnish an undertaking (in the prescribed form) stipulating that such provisions are not applicable to such person.

 

  • Sections 74(2) and 74(3) of the 2013 Act, dealing with repayment of deposits, have been notified with effect from June 6, 2014. Pursuant to Section 74(2), the National Company Law Tribunal (‘NCLT’), on an application made by a company after considering the financial condition of the company, the amount of deposit or part thereof, and the interest payable thereon, and such other matters, is empowered to allow further time as considered reasonable for repayment of deposits. As NCLT has not yet been constituted, MCA has clarified, by way of the Companies (Removal of Difficulties) Fourth Order, 2014, that until a date is notified by the Government of India (‘GoI’) for transfer of proceedings pending with the Company Law Board (‘CLB’) to NCLT, CLB is empowered to exercise jurisdiction, powers, authority and functions of NCLT under Section 74(2) of the 2013 Act.

 

AZB

 

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 
aditya.bhat[email protected]

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