Fund Raising a ladder for Corporate Growth

Fund Raising

A ladder for Corporate Growth

By Pavan Kumar VijayDated : March 26, 2017

LEGAL ASPECTS OF FUND RAISING

Companies Act, 2013 (Chapter III & IV in case of Allotment of Securities/Chapter V in case of

Public deposit)

Rules and Regulations under SEBI Act

SEBI (ICDR) Regulations, 2009

SEBI (LODR) Regulations, 2015

SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013

SEBI (Issue and Listing of Debt Securities) Regulations, 2008

SEBI (Issue of Sweat Equity) Regulations, 2002

SEBI(Substantial Acquisition of Shares and Takeovers) Regulations, 2011

MODES AVAILABLE TO INDIAN COMPANIES FOR RAISING

FUNDS WITHIN INDIADomestic

Issue

Equity

IPO

Offer for sale

Issue to Public

FPOOffer for

sale

Issue to public

Private Placement

Equity Shares with differential

voting rights

Right Issue Preference

Shares

Debentures

Secured Debentures

Un-secured debentures

Fully Convertible debentures

Partly-convertible Debentures

Foreign Issue

FDI ECB FCCB ADR/GDR

MODES AVAILABLE TO INDIAN COMPANIES FOR RAISING

FUNDS FROM OUTSIDE INDIA

PRIVATE PLACEMENT

PREFERENTIAL ISSUE (Equity

Shares, Preference Shares,

Debentures)

QUALIFIED INSTITUTIONAL

PLACEMENT

Instruments

Available For

Raising Funds

via Private

Placement

Route

Instruments for Fund Raising

Debentures (Sec 71 of CA, 2013)

Other Securities

( Sec 42/62 of CA, 2013)

Preference Shares

( Sec 55 of CA, 2013)

Equity Shares

(Section 43 of CA,

2013)

Private Placement

Preferential Offer

Issuance of Redeemable Debentures

Issuance of Redeemable Preference

Shares

Section 42 read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules,

2014

Section 62 read with Rule 13 of the Companies (Share Capital and

Debentures) Rules, 2014

Bible for all types of issues to a specific group of persons

Section 71 read with Rule 18 of the Companies (Share Capital and Debentures)

Rules, 2014

Section 55 read with Rule 9 & 10 of the Companies (Share Capital and Debentures) Rules, 2014

Compliances of Companies Act, 2013 (Applicable on all Companies)

• Prior approval of Shareholders is required to be obtained via Special Resolution for each tranche

• Justification or basis for the offer price to be disclosed in the Explanatory Statement calling General Meeting

• Minimum investment size (in face value terms) of Rs 20,000 per person

• Cash receipt prohibited

• Offer document to be circulated among all proposed allottees

Conditions related to Private Placement

A Stringent Regime governing all types of Companies

• 200 investors excluding QIB and ESOP

• Transfer of Securities is permitted

Offer in One FY

Limit would be reckoned individually for each class of

security (i.e. Equity, Debentures, Preference Shares, )

For Non-Convertible Debentures, a previous special resolution in respect of all the offers during one year can be obtained.

The above mentioned limit of 200 investors and Rs 20,000/- Face Value of Investment shall not be applicable to:

NBFC Companies; and

Housing finance companies;

Provided they comply with the Regulations made in respect of offers on private placement basis, by RBI or National Housing Board. However, if RBI or NHB have

not specified any similar regulations, even such companies would be required to comply with the provisions of these Rules.

Private Placement in terms of Section 42 read with Rule 14

of The Companies (Prospectus and Allotment of Securities)

Rules, 2014

Maintenance of complete database of the persons to whom the offer to subscribe to the securities is proposed to be

made

Offer of Securities will be made only through personalized offer letter to such persons whose names are recorded prior

to the invitation to subscribe

Maintenance of Record of the Bank Account of the Applicants

Allotment to be made within 60 days from the date of receipt of application money, else refund within 15 days from

the date of completion of 60 days

In the event of non-refund within the stipulated time period, repay with 12% interest p.a. from the expiry of sixtieth

day.

No fresh offer to be made unless previous offer is completed

Share application money to be kept in Separate Bank Account.

Conditions related to Private Placement

Penal Provisions for contravention with

the stipulations of Private Placements

If a Company makes an offer or accepts monies in contravention with the provisions of

Section 42, its promoters & directors shall be liable for a penalty which may extend to:

(a) The amount involved in the offer or invitation; or

(b) Rupees 2 Crores,

And

The Company shall also refund all monies to subscribers within 30 days of the order

imposing the penalty.

Whichever is higher

Securities as per Securities Contract (Regulation) Act, 1956

As per Clause (h) of Section 2, 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;

(ia) derivative;

(ib) units or any other investments issued by any collective investment scheme

to the investors in such schemes;

(ii) Government securities;

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

be securities; and

(iii) rights or interest in securities.

Use of term ‘securities’ instead of ‘shares’ - Use of the term shares in the Companies Act, 1956restricted the dictatorial roof for issuances of various other instruments by Company to raise funds.Companies manipulated this loophole by using other terminology or nomenclature for instrumentsused to raise funds, thereby easily escaping the regulatory oversight.

Scandals that lead Lawmakers to enact Stringent

Provisions

SaradhaChit Fund

Scam

Sahara

PonziSchemes

Influencers

SAHARA CASE

Sahara India Real Estate Corporation Limited and Sahara Housing Investment Corporation Limitedissued Optionally Fully Convertible Debentures (OFCD) and raised 20,000 crores from around 30million investors in guise of Private Placement.

Sahara’s Contentions Issue of Optionally Convertible Debentures was on private placement basis OFCDs were neither shares nor debentures but were hybrid securities Hybrid instruments are not marketable securities

SEBI ‘s Contention OFCD was a public issue and hence it made violation of Section 73 of Companies Act, 1956

(Public Issue) They were marketable hence ‘securities’ under SCRA

Observation of Supreme Court→ OFCD issued by Sahara are hybrid instruments but it is securities within the meaning of Companies Act, SEBI Act and SCRA

→ Although the definition of Securities under section 2(h) of SCRA does not contain the term hybrid instruments but it isinclusive definition and covers all “Marketable securities” and OFCD issued were offered to millions of people, hence theywere marketable, thus securities under SCRA.

→ Further, the name itself contains the term ‘debenture’, thus it is deemed to be a security as per the provisions ofCompanies Act, SEBI Act and SCRA

→ Issue was made to millions of people and the action of the company depicts that it wanted to issue securities to public inthe grab of private placement to bypass various laws and regulations

Outcome of caseSupreme Court ordered Sahara to refund the entire amount raised by the issue to the investors

“marketability” has always been important for determining the expression ‘securities’. In “Bhagwati Developers Vs PeerlessGeneral Finance (Civil Appeal 12640 of 1996)” decided on 09.08.2005 Supreme Court of India held that since securitiesissued by Unlisted Public Companies are marketable they are ‘securities’ as per SCRA. Further, in “SEBI Vs Pan Asia AdvisorsLtd (Civil Appeal No 10560 /2013)” decided on 06/07/2015 Supreme court held that Global Depository Receipt (GDR) areincluded in the definition of securities provided under SCRA by virtue of being marketable

Why Stringency in Provisions?? Lacunae in the legal provisions of the Companies Act, 1956 regarding private placement

have lead to increase in malpractices. :

Provisions of the Companies Act, 1956 were narrow and covered under its ambit

only shares and not all securities, while SEBI defines the term ‘securities’

While a private placement could be made only to a maximum of 49 persons at

one go, there was no provision to prevent companies from convening multiple

board meetings to approve such allotments. As a result, companies started calling

several meetings and made allotment to 49 allottees at each such meeting,

thereby manipulating the law.

Companies also took advantage of the overlapping of powers between the MCA

and SEBI to make multiple private placements.

The landmark judgment in the Sahara Case has set the direction for private placement code and the Companies Act, 2013 draws heavily out of the principles enunciated by the Apex Court

Preferential Offer in terms of Section 62 read with Rule 13 of The

Companies (Share Capital and Debentures) Rules, 2014

As per Explanation to Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014, ‘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.

“shares or other securities” means equity shares, fully convertible debentures, partly convertible debentures or any other securities, which would be

convertible into or exchanged with equity shares at a later date.

Section 62 read with Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014 pertaining to issuance of

Equity Shares & other convertible securities.

Provides Procedural Framework

Compliance of Private Placement provisions

Main Highlights of Section 62 read with Rule 13 of the

Companies (Share Capital and Debentures) Rules, 2014

Main Highlights of Preferential Offer

• Prior approval of Shareholders is required to be obtained via Special Resolution

• Allotment to be made within 12 months from the date of Special Resolution

• Mandatory Disclosures in the Explanatory Statement to the Notice calling General Meeting:

a. Intention of the promoters, directors & KMPs

b. Change in control, if any, consequent to the preferential offer

c. Justification for the allotment proposed to be made for consideration other than cash

d. Details of the proposed allottees along with post preferential shareholding

e. Basis on which price is arrived along with the report of Registered Valuer

f. In case of convertible instruments , conversion price can be decided upfront or at the

time of conversion

Rule 13 is

applicable only

on unlisted

companies

As on date, valuation can be done by an

Independent Merchant Banker or by

Independent Chartered Accountant in

Practice having minimum experience of

10 years.

Additional Laws Applicable on Listed

CompanyIf a Listed Company raises fund through Private Placement, then other than Companies Act, 2013, following laws and Regulations are also applicable

► SEBI (ICDR) Regulations, 2009

► SEBI (LODR) Regulations, 2015

► SEBI (SAST) Regulations, 2011

► SEBI (PIT) Regulations, 2015

Applicable Chapter Chapter VII

EligibilityNo issue to persons who have sold any equity shares of company during last 6 months preceding the relevant

date

Entire Pre-Preferential holding to be in demat mode only

Consideration

Equity Shares – 100% at the time of allotment

Warrants – 25% at the time allotment of warrants and balance 75% at the time allotment of equity shares

pursuant to conversion

Lock-in Requirement For Promoters – 3 years

From the date of trading approval

For Non- Promoters – 1 year

Allotment deadline Within 15 days of Shareholders’ approval ‘OR’ regulatory approval, whichever is later

Listing Application Within 20 days of allotment

Disclosures in Notice of General Meeting

Objects of the Issue

Pre and Post SHP along-with identity of allottees

Pricing and Relevant date

Ultimate Beneficial Natural Persons , in case of Non-Individual allottees

Pricing

If Shares are frequently traded - Higher of Average of High and Low of 26 weeks/2 weeks Weighted Avg.

Price preceding the Relevant date

If Shares are in-frequently traded – the Company shall take into account parameters like book value,

comparable trading multiples etc for determining price

Legal Requirements of Preferential Allotment as per SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009

Frequently and In-frequently Traded Shares

FREQUENTLY TRADED SHARES means shares , inwhich the traded turnover on any stockexchange during 12 calendar months precedingthe relevant date, is atleast 10% of total numberof shares of such class of shares.

Case- Company has Equity Cap. of Rs. 100 Crores, so forbeing frequently traded, trading turnover should beatleast Rs. 10 Crores during preceding 12 months,otherwise, it would be in-frequently traded shares

RELEVANT DATE In case of Preferential issue of Equity Shares – 30 days prior to General Meeting held for considering the issue

In case of Convertible Securities – either 30 days before GM or 30 days before the date on which holders of convertible securities become entitled to apply for equity sharesCase – If General Meeting is on 20 April, 2017Relevant date would be 21 Mar, 2017 and pricing computation to start from 20 Mar, 2017

Practical Aspects

Practical Difficulties Faced By Companies

Section 42 mandates that next offer should be initiated after completion/withdrawal of previous offer. So, if warrants havebeen allotted, say on 1st Jan, 2017, can next round of Equity be initiated say in April, 2017 or Company will have to wait tillconversion of those warrants ?

Yes, the next round can be initiated in April 2017 as upon allotment of warrants, 1st Jan, 2017 round got completed

As per ICDR Regulations, if any promoter has sold shares during preceding 6 months, the entire Promoter Group becomesineligible for Pref. allotment, so if there has been an inter-se-transfer among promoters, will it refrain the promoters fromacquiring pref. allotment ?

Yes, the entire Promoter Group is refrained, since even an Inter-se-transfer is considered a sale

If allottee is a HUF, still the name of ultimate beneficial owner is required to be given ?

Yes

Can a preferential allotment be made to a Partnership firm?

Yes, in the name of Partner, who will hold it on behalf of the firm

Can Preferential allotments be made at different prices at the same General Meeting to different categories of allottees. (Eg.@ Rs. 20 to Promoters and @ Rs. 30 to Non-Promoter)

Yes, this can be done, if the allottees agree to it

In case of allotment of warrants, if the subscribers fail to convert their securities within 18 months, will the subscriptionmoney of warrants be refunded to the allottees

No, it stands forfeited

If any preferential allotment is subject to due diligence, at what time, to disclose to stock exchange u/r 30 of LODR

- At the time of 1st discussion with Private Equity Firms

- Upon signing of term sheet

- Upon entering into a binding agreement

- After the board meeting

In our opinion, upon signing the term sheet , since the disclosure required to be given u/r 30 of LODR is finalized only after signing of term sheet


Can allotment be made by passing resolution by circulation

Yes

Can a proposed preferential offer be considered by “Resolution by Circulation”

No


If Value of transactions > Rs. 10 lacs in any Calendar Quarter

Disclosure by the Allottees (if allottee is a promoter, employee and Director)

Within 2 Trading Days from the date of Allotment

by Company

Within 2 Trading Days from the date of receipt from the allottee

Stock Exchange(s)

Applicability of SEBI PIT Regulations, 2015- Regulation 7(2)

Regulation says-Disclosure is to be given within 2 trading days for transactions having valueof more than Rs. 10 lacs in any calendar quarter.

Issue- Allotment Size: Rs. 7 Lacs; Market Value: Rs. 11 Lacs

Whether Disclosure required???

Answer- Yes, disclosure will be made

Practical Issues

Preferential IssueVs

Takeovers

Issues highlighted

Preferential allotment to following category of persons:

Preferential allotment

Promoter category; Non-promoter category;

Threshold limits of Takeover Code are:

Regulation 3(1) triggers if any person along with person acting in concert acquires

25% of more of the voting rights of the Company;

Regulation 3(2) triggers when person already holds 25% or more in the Company

and acquires additional 5% of the voting rights in any one FY;

How Preferential allotment breaches the

threshold limit under Takeover Code

If allotment is within the threshold limits of SAST provisions then

there would be no requirement to make Takeover Open Offer;

The disclosures under SAST shall be made by the Acquirer

Allotment of shares

Regulation Who has to disclose

When to disclose Time period To whom to disclose

Regulation 29(1) Acquirer On allotment of more than 5% of the voting rights in the Company

2 working days STX and Target Company

Regulation 29(2) Acquirer If Acquirer already holds 5% voting rights and then pursuant to allotment, there is a change in shareholding by more than 2% of voting rights;

2 working days STX and Target Company

Disclosures under SAST

If allotment of shares triggers the threshold limit of Takeover Code;

How to check the threshold limit?

Allotment of shares

Question: Acquirer along with person acting in concert are not holding any shares in the Target Company, allotment of more than 25% would attract the provisions of SAST?

Answer: Yes, the allotment would attract the provisions of Regulation 3(1) of SAST.

The threshold limit has to be checked individually as well as collectively

How to check threshold limit

Question: Acquirer along with person acting in concert already holdsmore than 25% of the voting rights of the Target Company,then whether the preferential allotment of more than 5% ofthe voting rights would trigger Takeover Code?

Answer: The preferential allotment of more than 5% of the votingrights would attract the provisions of Regulation 3(2) underTakeover Code

The threshold limit has to be checked individually as well as collectively

How to check threshold limit

If preferential issue of Equity Shares triggers the Open Offer, PublicAnnouncement shall be made on the date of Board Meetingapproving Preferential allotment;

If preferential issue of convertible securities triggers the Open Offer,the date to make Public Announcement may differ in these of thefollowing cases:

(a) Issuance of convertible security with fixed date conversion;

(b) Issuance of convertible security without fixed date conversion

Offer through Preferential Allotment

Timing to make an Open Offer

Convertible security with fixed date conversion;

Public Announcement shall be made on the second working day preceding the scheduled date of conversion of such security into Equity Shares of the Company

Example: Fixed date conversion of security is 31.03.2017;

Public Announcement shall be made second working day preceding the date of conversion i.e. on 29.03.2017


Convertible security without fixed date conversion;

Public Announcement shall be made on the same day on which theconversion of such security into Equity Shares of the Company willbe done


Offer shall be made for 26% of the Expanded Share Capital of the Target Company;

Expanded share capital means taking into account all potential increases in the number of outstanding

shares during the offer period contemplated as of the date of the public announcement

Example 1:

Present paid up capital: 100 shares

Preferential allotment: 50 shares

Offer shall be made for 26% of the expanded share capital i.e. 150 shares

Example 2:

Present paid up capital: 200 shares

Pending warrants for conversion: 100 shares

Offer shall be made for 26% of the expanded share capital i.e. 300 shares

Offer Size

• If the preferential allotment is triggering the requirement to make Takeover Open Offer;

• Then the status of trading and pricing shall be calculated on the following days:

(a) As on Relevant date;

(b) As on the date of Public Announcement

Example: Issuance of Equity Shares through preferential issue

Relevant date is 30 days prior to the date of shareholders approval

Public announcement is the date of Board Meeting approving preferential allotment

Status of Trading

Pricing – Frequently traded – Preferential Pricing

Parameter 1: Average of the weekly high and low of the Volume Weighted Average Price (VWAP)

during preceding 26 weeks prior to the relevant date;

Parameter 2: Average of the weekly high and low of the Volume Weighted Average Price (VWAP)

during preceding 2 weeks prior to the relevant date;

Additional Parameter as per Takeover Code

Parameter 3: the VWAMP of such shares for a period of 60 trading days immediately preceding

the date of the Public Announcement as traded on the stock exchange where the maximum

volume of trading in the shares of the target company are recorded during such period, provided

such shares are frequently traded

Calculation

26 weeks Volume Weighted Average Price (VWAP)

Weeks High Low Average

1st week 12 10 11

2nd week 11 9 10

………. ………. ………. ……….

……….. ………. ………. ……….

26th week 9 9 9

Total 30

Average Price 10

Pricing – Frequently traded - ICDR

Calculation

2 weeks Volume Weighted Average Price (VWAP)

Days High Low Average

1st day 14 10 12

2nd day 11 9 10

………. ………. ………. ……….

……….. ………. ………. ……….

14th day 18 12 15

Total 37

Average Price 12.33

Pricing – Frequently traded - ICDR

Calculation

60 trading days Volume Weighted Average Market Price (VWAMP)

Days No. of Shares traded

Weighted average price (WAP)

VWAP

1st day 10000 14 140000

2nd day 10000 6 60000

………. ………. ………. ……….

……….. ………. ………. ……….

60th day 30000 5 150000

Total 50000 350000

Average Price 7

Pricing – Frequently traded – Takeover Code

As per Takeover Code, the Offer Price shall be highest of all the

following price mentioned:

(a) 26 weeks VWAP;

(b) 2 weeks VWAP;

(c) 60 trading days VWAMP

Pricing – Frequently traded

If infrequently traded, the pricing shall not be less than the pricedetermined after taking into account valuations parametersincluding book value, comparable trading multiples and such otherparameters as may be customary for valuation of shares;

Pricing – Infrequently Traded

PARTICULARSCOMPANIES ACT

(SECTION 42)

COMPANIES ACT

(SECTION 62)SEBI LODR SEBI ICDR

Eligibility <200 investors - - No Sale by the allottee Within Last 6 months

Issue of Securities Shares or other

SecuritiesSpecified Securities Shares or Convertible Securities

Shareholders Approval Yes, Special Resolution Yes, Special Resolution - Yes, Special Resolution

Offer Document Yes - - -

ConsiderationThrough Banking Channels,

No cash

Through Banking

Channels or

consideration other than

cash

-Banking Channels/Consideration other than

cash

Disclosure document In the Offer DocumentIn the GM Notice

- In the GM Notice

PricingFor Unlisted Companies

by Registered Valuer-

As per pricing methodology, depending

upon Frequently Traded/ Infrequently

Traded scrip

Valuation report Not required Required - CA Certificate needed for pricing

Allotment periods60 days from receipt of

money

Within a period of 12

months-

15days from shareholders’ approval/

regulatory approval, whichever is later

Listing Application -20 days of

allotment-

SUMMING UP PREFERENTIAL ALLOTMENT

Qualified Institutional Placements

Governing Provisions

Chapter VIII of SEBI (ICDR) Regulations, 2009

Section 42 and 62 of the Companies Act, 2013

► Prospective Allottees: Only- QIBs belonging to Non- promoter category

► Minimum Price: Avg. of the weekly High & Low of closing prices during 2 weeks preceding

the Relevant Date;

Relevant Date (R.D.)

Case 1. In case of Placement of Equity Shares:

Date of Board meeting in which Board decides to open the Issue;

Case 2. In case of Placement of Convertible Securities:Either date mentioned in Case 1

orDate on which the Holders of

Convertible Securities become entitled to apply for Conversion

Qualified Institutional Placements-Chapter VIII ICDR

► Pre-Requisite : Only- QIBs belonging to Non- promoter category:

Shareholders Approval (Valid for 12 months);

Securities are listed on Stock Exchanges having nationwide trading terminal for

atleast 1year.

Appointment of MB to conduct due diligence;

Preparation of Placement Document;

Allotment cannot be made to a Promoter QIB

► No. of allottees: 2, if issue size<Rs. 250cr.

5, if issue size >Rs. 250cr Lock –in: 1 year. However no lock-in requirement if transaction take place

through the Stock Exchanges.

Continued…

Particulars Preferred Allotment QIP

Proposed Allottees Can be anyone- Promoter or non

Promoter

Only QIPs, that too not belonging

the promoters

Pricing 26W/2W averaging as on Relevant

Date

2 weeks averaging as on Relevant

Date

Validity of Special

Resolution

15 days- allotment to be made

within 15 days

12 months

Appointment of MB &

due diligence

Not Mandatory Mandatory

Offer Document Companies Act: Yes

ICDR: NO

Companies Act: Yes

ICDR : Yes

No. of Allottees < 200 2, if issue size<250cr.

5, if issue size >250cr.

Lock In 1yr/3yr, depending upon non-

promoter/promoter allottees

1yr, Except on a recognized Stock

Exchange.

Private Placement V/S QIP Issue

RIGHTS ISSUE


Section 62 of the Companies Act, 2013

Chapter IV of SEBI (ICDR) Regulations, 2009

Key Provisions Under Rights Issue, subscribed capital is increased by offering shares to the existing shareholders in proportion

to their existing shareholding the Company. All shareholders are treated equal in terms of shares offered. Key Provisions related to right issue Key provisions

- the offer limiting a time not being less than 15 days and not exceeding 30 days;- the offer shall include right to renounce;- BOD may dispose of unsubscribed shares in such manner which is not dis-advantageous to the shareholders

and the company.- No pricing guidelines prescribed- Offer Letter has to be sent to the shareholders atleast three days before the date of opening of the Rights

Issue- Private Company can keep offer period less than the statutory requirements and can send letter of offer ,

earlier than three days before the date of opening of the offer, if it obtains consent of 90% of its members.

In case of right issue size of more than Rs 50 Lacs by listed company, appointment of Merchant Banker ismandatory

Issues in Rights Issue

Have been used as a tool to avoid compliances of provisions of private

placement as shares offered to the existing shareholders , can be renounced to

any third party

Right to dispose off the unsubscribed issue, gives Board unfettered right to offer

shares to any third party

Practical Queries

Is there any time period within which the Board shall dispose of the shares not subscribed under the rights issue to any other person in a manner which is not disadvantageous to the shareholders?

No period is prescribed but the Board should act within a reasonable time.

Whether share can be renounced to even non-shareholders?

Yes

Whether the Board can cancel the unsubscribed portion of the right issue?

Yes, the Board is empowered to cancel the unsubscribed portion of the right issue under section 62.

Rights Issue triggering Takeover Code

Promoter proposes to acquire beyond his entitlement pursuant to arights issue then he should disclose this intention to acquireadditional shares in the application to acquire rights shares;

Acquisition of additional shares beyond entitlement may trigger theprovisions of Regulation 3(2) of SEBI (SAST) Regulations, 2011;

Regulation 10 of SEBI (SAST) Regulations, 2011 exempts theshareholders from the provisions of Regulation 3(2) of SEBI (SAST)Regulations, 2011

Shares acquired under Rights Issue

Automatic exemption from Regulation 3(2) can be claimed only when the following conditions are met:

(A) Acquirer has not renounced any his entitlements in such rights issue;

(B) The pricing at which rights issue is made shall not be higher than the sum of ex-rights price of the shares of the Target Company

Shares acquired under Rights Issue

First = VWAP (60 trading days) X Total share capital prior to right issue

Total share capital post right issue

+Second = Right Issue Price X Right Issue shares

Total share capital post right issue

What is Ex-Rights Issue Price

Example:

Rights Issue Price = Rs. 20 per share;

Volume weighted average price of 60 trading days = Rs. 80;

Total share capital prior to rights issue = 100 shares;

Total share capital post to rights issue = 200 shares;

Ex Rights Price = 80x100 + 20x100 = Rs. 50 per share

200 200

As calculated above, exemption can be claimed if the Right Issue Price is less than the Ex-Right Pricecalculated

What is Ex-Rights Issue Price

The pricing at which rights issue is made shall not be higher than the SUM of ex-rights prices calculated above

To summaries

SHARES WITH DIFFERENTIAL RIGHTS



Rule 4 of the Companies (Share Capital and

Debentures) Rules, 2014

Key Provisions

Authorization in Articles of Association

Authorized by an Ordinary Resolution; [If the company is listed or if the number of members are

more than 200 then ensure it obtains the approval of its shareholders through postal ballot

Shares with differential rights shall not exceed 26% of the total post-issue paid up equity share

capital including equity shares with differential rights issued at any point of time;

Having track record of distributable profits for last 3 years;

Not defaulted in filing financial statements and annual returns for 3 financial years;

Key Provisions

No subsisting default in payment of dividend/ repayment of deposits/ redemption of preference shares or

debentures/ payment of interest on such deposits or debentures;

Not defaulted in payment of dividend on preference shares/ repayment of any term loan from Banks or PFI’s

or interest payable thereon/ dues with respect to statutory payments/ default in crediting the amount in IEPF;

Not penalized by Court or Tribunal during the last three years of any offence under the RBI Act, SEBI Act,

SCRA, FEMA, or any other special Act.

The holders of the equity shares with differential rights shall enjoy all other rights such as bonus shares, rights

shares etc., which the holders of equity shares are entitled to, subject to the differential rights with which

such shares have been issued.

Listed Companies can’t issues equity shares with superior voting or dividend rights (SEBI (LODR) Regulations )

BONUS SHARES



Rule 14 of the Companies (Share Capital and Debentures) Rules,

2014

Chapter IX of SEBI (ICDR) Regulations,

2009

Common Conditions applicable to all Companies

Authorization in Articles of Association

Approval of shareholders by way of special resolution

No default in payment of principle / int. on FDs or debts securities.

No partly paid up shares should exist

Can be made out of free Reserves/ Share Premium/CRR

Revaluation Reserve not to be utilized

Bonus Shares can’t be issued in lieu of dividend.

Additional Conditions for Listed Companies

Record date shall be only after the date of General meeting

Bonus issue to be completed within 2 months from the date of Board

approval. Completion means including obtaining trading approvals from

the SEs.

If these are compulsorily convertible debentures, reservation for bonus

shares must be made in respect of them

Practical Queries

Can a company withdraw the bonus issue of shares once it is announced?

Rule 14 of the Companies (Share Capital and Debentures) Rules, 2014 clearly states that a

company which has once announced the decision of its Board recommending a bonus issue,

shall not subsequently withdraw the same.

Whether the company can issue bonus shares if it has rectified its default in interest

payments or principal amount in respect of fixed deposits or debt securities issued by it?

Law is silent on it, but answer is probably yes.

Acceptance of Deposits under the Companies Act, 2013


Chapter V of the

Companies Act, 2013

Companies

(Acceptance of

Deposits) Rules, 2014

“Deposit” includes any receipt of money by way of deposit or loan or in any other

form by a Company, but does not include such categories of amount as may be

prescribed in consultation with the Reserve Bank of India.

Deposits – As per Section 2(31) of the

Companies Act, 2013

• Any share application money accepted under this Act shall be treated as Deposit if allotment is not made

within 60 days.

• Customers Advances if not appropriated within 365 days shall be deposit.

• Convertible Bond or debentures with conversion period of more than 10 years are deemed deposit.

• Any amount received by a company from any other company shall not be treated as Deposits.

• Any amount received from the Government/ Authority shall not be treated as Deposits.

Amounts exempted from Deposits

• Any amount received from a person who, at the time of the receipt of the amount, was a director of the

company or a relative of the director of the private company shall not be treated as Deposit.

• Any amount received from an employee of the company exceeding his annual salary with the company shall

be treated as Deposit.

• An amount of Rs. 25 lacs or more received by a start-up company by way of a convertible note (convertible

into equity shares or repayable within a period not exceeding five years from the date of issue) in a single

tranche, from a person shall not be treated as Deposit.

• Any amount received by a company from alternate Investment Funds, domestic Venture Capital Funds and

Mutual Funds registered with the Securities and exchanges Board of India in accordance with regulations

made by it.

Amounts exempted from Deposits

Eligible Company Non-Eligible Public Company Private Company

From any memberFrom Public

* Eligible Companies are Public Companies having net worth of at least INR 100 crore

or turnover of at least INR 500 crore and are allowed to raise deposits from the

persons other than its members

From whom Deposits can be accepted??

C

O

M

P

A

N

I

E

S

DEPOSITS

Deposits From PublicFrom Members

By Eligible Companies

25% of paid-up capital,

free reserves and

securities premium

account.


free reserves and

securities premium

account

By Public Company (Non-eligible

Company)-


free reserves and

securities premium

account

By Private Company -


free reserves and

securities premium

account

By Government Company35% of paid-up capital, free reserves and securities

premium account

Limit on Acceptance of Deposits

* A company may, for the purpose of meeting its short term

requirement, accept the deposits for repayment earlier than 6

months, but not earlier than 3 months & such deposits shall not

exceed 10 % of paid-up share capital, free reserves & security

premium account.

No Company shall accept any deposit which is repayable within a

period of :-

Less than 6

months

More than

36 monthsOR

Period for Accepting Deposits

Non-Applicability of Deposit

Rules

Banking Company

NBFC

Housing Finance Company

registered with NHB

Non-Applicability of Public Deposits Rules

on certain Companies

• By Eligible CompaniesSpecial Resolution

• By Non-eligible Public Companies

• By Private CompaniesOrdinary Resolution

Resolutions Required

Issuance of Circular to all its

members by registered post or

speed post or by electronic mode

in Form DPT-1

Filing a copy of the Circular with

ROC within 30 days before the

date of issuance of the Circular.

Not applicable on

private company

Mandatory Appointment of one or more Deposit Trustees for

creating security for the Deposits (in the event of inviting secured

deposits) by executing Trust Deed as prescribed in terms of Form

DPT-2 within 7 days before issuing the advertisement inviting

Deposits.

Important Compliances

As per Section 73 (2) (c) of the Companies Act, 2013 read with Rule 13 of the Companies

(Acceptance of Deposits) Rules, 2014, a deposit of not less than 15% of the amount of its deposits

maturing during the Financial Year and the next following financial year is required to be maintained

with scheduled commercial bank in a separate bank account to be called as Deposit

Repayment Reserve Account on or before the 30th day of April of each year.

For Example: If the Company came out with the Deposit Issue of Rs. 50 Crores wherein Deposits

amounting to Rs. 12 Crores are to be redeemed during the current financial year and Rs. 20 Crores are

proposed to be redeemed in the next financial year, then the Company is required to deposit Rs. 4.80

Crores

(15% of 32 Crores)

Note- this provision is not applicable on private company

Deposit Repayment Reserve Account

Every eligible company shall

* Furnishing of Return with ROC in Form DPT-3 on or before 30th June ofevery year for the period ended 31st March as per the information dulyaudited by the Auditor.

obtain, at least once in a year, credit rating for deposits accepted by it and a copy of the rating shall be sent to the Registrar of Companies

along with the return of deposits in Form DPT-3.

Important Filing

• The Company shall in addition to the payment of the amount of deposit or part thereof

and the interest due, be punishable with fine which shall not be less than Rs 1 crore

but which may extend to Rs 10 crore; and

• every officer of the company who is in default shall be punishable with imprisonment

which may extend to seven years or with fine which shall not be less than Rs 25 Lacs

but which may extend to Rs 2 crore, or with both:

• If the default is knowingly or wilfully with the intention to deceive the company or its

shareholders or depositors or creditors or tax authorities, he shall be liable for action

under section 447.

Penal Provisions as per Section 76A

• Penal Rate of Interest: 18% per annum for the overdue period in case of deposits,

whether secured or unsecured, matured and claimed but remaining unpaid.

• Punishment for Contravention: Company & every officer of the Company who is in

default shall be punishable with fine which may extend to Rs. 5000 and where the

contravention is a continuing one, with a further fine which may extend to Rs. 500 for

every day after the first day during which the contravention continues.

Penal Provisions as per Rules

Pavan Kumar VijayFounder & Managing DirectorD-28, South Extn. Part- I,New Delhi 110049 F: +91 1140622201T: +91 [email protected] www.corporateprofessionals.com

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