New Company Law

A Paradigm Shift

Financial System

‘(h) “securities” include—

(i) shares, scrips, stocks, bonds, debentures, debenture stock or other

marketable securities of a like nature in or of any incorporated company or

other body corporate – eg. FCCB, GDR, OFCD

(ii) Derivative like call options, put options, swaps, etc..

(iii) units or any other instrument issued by any collective investment scheme to

the investors in such schemes Like MF units

(iv) security receipt under SARFESI

(v) units or any other such instrument issued to the investors under any

mutual fund scheme ( but excludes ULIPs)

(vi) any certificate or instrument (by whatever name called), issued to an

investor by any issuer being a special purpose distinct entity which

possesses any debt or receivable, including mortgage debt, assigned to

such entity, and acknowledging beneficial interest of such investor in such

debt or receivable, including mortgage debt, as the case may be;]

(vii) Government securities;

(viii) such other instruments as may be declared by the Central Government to

be securities; and]

(ix) rights or interest in securities;’

Norms Extended to all securities

Public offer

Private Placement

Transfer

Transmission

Maintaining Register

Compulsory Listing

Complying norms of Listing

Insider Trading

Norms Extended to all securities

Dematerialisaton

Minimum Subscription

Allotment

Nomination

Role of Tribunal ‘

Auditor’s Role

Greater Role of Government

• Private Placement within its purview

• Disclosures in Prospectus

• Norms for GDRs

Tussle between Government

and SEBI • Section 24 prescribed

SEBI’s powers

• CG has tried to

encroach upon its

power

• Power of investigation

• SEBI debarred from

exercising powers

which are given to CG

under new Act

Anti Fraud Safeguards(AFS) –1

Fraud: Multiple Demat Accounts

Stringent penalties for Fictitious

Application and Multiple Applications

It is a fraud u/s 447

Liable for 6 months -10 years

imprisonment

Plus fine = amount of fraud upto 3 (

amount of fraud)

Plus Disgorgement

AFS2: Non Disclosures

F: In 2011, SEBI found that promoters and directors of

companies like Taksheel Solutions, RDB Rasyans,

Onelife Capital Advisors, Brooks Laboratories, PG

Electroplast, guilty of not make adequate disclosures in

their initial public offers

AFS:

Government has retained powers to specify disclosures

Any misstatement in prospectus constitutes a fraud – so fine and imprisonment

Cognisable Offence

Additional charges for damages in civil proceedings

Unlimited liability of directors, experts, promoters, etc

Person who authorised the issue – so even merchant bankers are under the garb

AFS3: Diversion of Funds

F: In most of cases stated in earlier slide, SEBI also found that companies

had diverted inter-corporate deposits to entities (mostly inter financial

intermediaries) that used the money to buy shares of these companies.

These shares, which were illegally procured, were sold at a premium to the

issue price on the first day of listing. It was also found that some of these

company had also wrongly utilised IPO proceeds to fund the losses incurred

by certain trading clients on the first day of listing. Merchant bankers and

QIBs were accessories to these frauds.

AFS: Section 27:

Variation in terms of Prospectus or in terms of contracts only by special

resolution

Cannot use IPO proceeds for trading in shares of listed companies

Exit offer to shareholders

AFS 4: Frauds by Financial

Intermediaries F: Misselling of financial Products is

rampant. Many advisors give false

promises of high returns.

AFS:

Mis-selling is a fraud under company law

Cognisable Offence

It extends to any security

Safeguards against mis-selling of mutual

funds is also included

AFS5: Sahara Case

F: In Sahara Case, huge funds were

collected ( to the extent of 25,000 cr and

above) By Sahara Group companies by

exploiting the ambiguities under old Act

AFS: Section 42 : Private Placement

1. New norms

2. Concept made crystal clear

3. Stringent provisions

4. Stringent penalties

Private Placement

• Private Placement

• Of securities

• Select group of people

• Private placement offer letter

• Restriction of private placement in year

• Restriction of shares acquired by private

placement

• Number of private placement

Private Placement

• Allotment Process

• Records and Disclosures

• Restriction of Fresh Offer

Prospectus

• Disclosures as per Government directions

• Shelf prospectus

• Applicable for securities

• Not applicable to GDR

Share Capital

• Types of shares unchanged

• Norms for preference shares changed

• Preference shares by infrastructure companies

can be redeemable beyond 20 years

• Disabilities on account of default in redemption

of preference shares – Like inability to buy back

• Voting Rights – no distinction between

cumulative and non cumulative voting rights

Variation in Voting Rights

• Consent of 3/4th or SR of the class

• New Safeguards for other shareholders

Analysis of New Safeguard

• The Act has inserted a proviso wherein now a

company needs to take into consideration the

wishes of other classes of shareholders whose

‘rights are affected’ by variation of rights of a

class of shareholders.

• Will the approval be required only if the change

has a negative impact on the shareholders? Or

will it be required even if the change has a

beneficial impact?

Analysis of New Safeguard

The meaning of the term ‘affect’ has to be explored

to answer these questions. Various dictionaries

have defined ‘affect’ as follows:

Black’s Law Dictionary, Bryan A. Garner, Ninth

Edition, 2009:

‘Most generally, to produce an effect on; to

influence in some way….’

Chambers 21st Century Dictionary:

‘to have an effect on someone or something.’

Transfer and Transmission

• Transfer of interest of member

• Transfer of securities

• Time limit for delivery of share certificate

cannot be extended

• Free Transferability of all securities of

public company

• Shareholders agreements recognised

• Power to approach Tribunal for

rectification restricted only to members

Debentures

• Unchanged Conditions

– convertible debentures after special

resolution

– DRRA

– Redemption

• Changed Conditions

– Failure to redeem

– Specific Relief

– Mandatory Appointment of Debenture Trustee

only above 500

Corporate Actions

• Shares at a Premium – 52

• Shares at a Discount cannot be issued

- interpreting discount to its price

• Powers to alter share capital – 61 - The approval of Tribunal is required if consolidation or

division of shares into shares of a larger amount results

in changes in the voting percentage of shareholders.

This is likely when a company has issued shares with

differential voting rights.

Rights Issue

• Offer can be kept open for a Maximum

period of 30 days

• This provision not extended to securities

• Provision is applicable to private

companies unless exempted

• No CG intervention if the company fails to

get SR

ESOP

• Director/officers/employees

– Company

– Holding company

– Subsidiary company

• ESOP can now be offered even to part

time and non executive director

• ESOPs cannot be issued to Independent

Directors

Sweat Equity

• Date of commencement important

• Definition of company changed

Sweat Equity

• Can a dormant company issue sweat

equity? - No

• Can one person company issue sweat

equity shares? -

• Can sweat equity shares be issued for

consideration other than cash to director?

• Can sweat equity shares be issued to

promoters?

• Can sweat equity shares be issued at

discount?

Sweat Equity

• When can sweat equity shares be issued? -

‘commenced business’.

• However, under the new Act, the period of one year will

begin from the date the company has ‘commenced

business’.

• What constitutes commencement of business?

• Is the date of incorporation deemed to be the date of

commencement of business of the company? Or is it the

date when the declaration and verification are filed under

section 11 of the new Act?

• These questions are not answered in the Act. Thus, we

have to go to the dictionary meaning to assess its true

meaning.

• P Ramanatha Aiyer, - words commence and

commencement of business

• ‘Commence: to begin; to originate; to cause to

begin; perform the first act of, inter upon; to do

the first act in anything; to take the first step...’

• ‘Commence any business: “commence any

business” does not mean merely the business

for which the company was started, but any

transaction including, sale, purchase, etc. ”

Bonus Shares

• Additional Conditions can be issued by

Government

• Company cannot withdraw grant of bonus

once declared

• Defaults –

– payment of interest or principal in repect fixed

deposits

– Statutory dues

Reduction of Capital

• Single Procedure

• Representation of ROC/CG/SEBI

• Certificate not a conclusive proof

• Defaulters defaulting in repayment of deposits

are not entitled to discount

• No “any reduced”

• No specific authoritisation in Articles necessary

• Auditors Certificate

• Fraud on Creditors

Buy Back

• Subsequent buy back

– One Year For Both

Types Of Buy Back

• Defaults

– Subsisting

– 3 years thereafter

• Additional fetters

– Annual return

– Declaration/distribution

of dividend

– Financial statement

– Board report

– CFS

• Serious implication of

wring statements in

Declaration of

Solvency

• Odd lots

Thank you

• prachimanekar@gmail.com