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INTRODUCTION

Section 8 of the Companies Act, 2013 provides for a mechanism through which an Association can be registered as a Company, if such association is formed for promoting commerce, art, science, sports, education, research, social welfare, Charity, religion, protection of environment or any other useful object and intends to apply its profits/income in promoting its objects. The objective of this provision is to provide corporate personality to such Associations but at the same time exempting them from some of the cumbersome legal requirements. Section 8 companies also plays very important role in compliance of the provisions of corporate social responsibility. Under the provisions of Section 8 of the Companies Act, 2013, a company can also be formed for non-profit objectives. These may not be charitable. These companies are also allowed to drop the words ‘limited’ or ‘private limited’ from their names. The promoters while deciding whether to register themselves as a society or as section 8 company may keep the following distinctive feature in mind:

 WHO CAN FORM A SECTION 8 COMPANY

• Any two or more persons or association of persons (including a partnership firm)
• Any existing company

Here it is important to mention that One Person Company cannot be a Section 8 Company. (Rule 3(5)) of Company Incorporation Rules.

PROCEDURE FOR INCORPORATION OF SECTION 8 COMPANY

1. Obtain Digital Signatures

Nowadays various document prescribed under the Companies Act, 2013, are required to be filed with the digital signature (DSC) of the Managing Director or Director or Manager or Secretary of the Company, therefore, it is compulsorily required to Obtain a Class II Digital Signature Certificate from authorized DSC issuing Company for at least one director to sign the E-forms related to incorporate like form INC.1 and other documents.

2. Obtain Director Identification Number

 As per 153 of the Companies Act, 2013, every individual intending to be appointed as director of a company shall make an application for allotment of Director Identification Number in form DIR.3 to the Central Government in such form and manner and along with such fees as may be prescribed.

Therefore, before submission of e-Form INC.1 for availability of name, all the directors of the proposed company must ensure that they are having DIN and if they are not having DIN, it should be first obtained.

3. Name availability for proposed company

 As per section 4(4) read with Rule-9 of Companies (Incorporation) Rules, 2014, application for the reservation/availability of name shall be in Form no. INC.1 along with prescribed fee of Rs. 1,000/-. In selection of Company name should be in accordance with name guidelines given in Rule-8 of Companies (Incorporation) Rules, 2014. The name will be valid for a period of 20 Days from the date on which the application for Reservation was made. However, Registrar can extend the same on application for extension by the applicant. After approval of name ROC will issue a Name availability letter w.r.t. approval for availability of name for a proposed company.

4. Preparation of the Memorandum of Association (MOA) and Articles of Association (AOA)

 Drafting of the MOA and AOA is generally a step subsequent to the availability of name made by the Registrar. It should be noted that the main objects should match the objects shown in e-Form INC.1. These two documents are basically the charter and internal rules and regulations of the company. Therefore, it must be drafted with utmost care and with the advice of the experts and the other object clause should be drafted in a very broader sense. The memorandum of association of the proposed company shall be in Form No.INC.13 and Articles of Association in  Form INC 31.

5. License under section 8 for new companies with charitable objects

A person or an association of persons (hereinafter referred to in this rule as “the proposed company”), desirous of incorporating a company with limited liability under sub-section (1) of section 8without the addition to its name of the word “Limited”, or as the case may be, the words “Private Limited”, shall make an application in SPICe+ Simplified Proforma for Incorporating company Electronically Plus: INC-32) along with the fee as provided in the Companies (Registration offices and fees) Rules, 2014 to the Registrar for a license under sub-section (1) of section 8.

• The memorandum of association of the proposed company shall be in Form No.INC.13.
• The application filed under sub-rule (1) shall be accompanied by the following documents, namely.
• The memorandum and articles of association of the proposed company.
• The declaration by an Advocate, a Chartered Accountant, Cost Accountant or Company Secretary in practice, that  [the memorandum] and articles of association have been drawn up in conformity with the provisions of section 8and rules made thereunder and that all the requirements of the Act and the rules made thereunder relating to registration of the company under section 8 and matters incidental or supplemental thereto have been complied with;
• An estimate of the future annual income and expenditure of the company for the next three years, specifying the sources of the income and the objects of the expenditure.
• The declaration by each of the persons making the application.
• A company registered under this section shall not alter the provisions of its memorandum or articles except with the previous approval of the Central Government.
• The company registered under this section shall enjoy all the privileges and be subject to all the obligations of limited companies.

 

REVOCATION OF LICENSE

License issued under section 8 can be revoked on account of non-compliance of any of the provisions relating to the grant of the License and conditions of the said license. Central Government has power to revoke the license granted to a company under section 8 of the Act. Sub-section (6) of the section 8 of the act states that the Central Government may, by order, revoke the license granted to a company registered under this section if the company contravenes any of the requirements of this section or any of the conditions subject to which a license is issued or the affairs of the company are conducted fraudulently or in a manner violative of the objects of the company or prejudicial to public interest.

The central Government, without prejudice to any other action against the company under this Act, direct the company to convert its status and change its name to add the word “Limited” or the words “Private Limited”, as the case may be, to its name and thereupon the Registrar shall, without prejudice to any action that may be taken, on application, in Form No. INC.20 along with the fee as provided in Companies (Registration, Offices and Fees) Rules, 2014 to convert its status and change of name accordingly.

Where a license is revoked under sub-section (6), the Central Government may, by order, if it is satisfied that it is essential in the public interest, direct that the company be wound up under this Act or amalgamated with another company registered under this section:

Where a licence is revoked under sub-section (6) and where the Central Government is satisfied that it is essential in the public interest that the company registered under this section should be amalgamated with another company registered under this section and having similar objects, then, notwithstanding anything to the contrary contained in this Act, the Central Government may, by order, provide for such amalgamation to form a single company with such constitution, properties, powers, rights, interest, authorities and privileges and with such liabilities, duties and obligations as may be specified in the order.

• If on the winding up or dissolution of a company registered under this section, there remains, after the satisfaction of its debts and liabilities, any asset, they may be transferred to another company registered under this section and having similar objects, subject to such conditions as the Tribunal may impose, or may be sold and proceeds thereof credited to [“Insolvency and Bankruptcy Fund formed under section 224 of the Insolvency and Bankruptcy Code, 2016“]

 

• A company registered under this section shall amalgamate only with another company registered under this section and having similar objects.

CONVERSION OF SECTION 8 COMPANY INTO ANY OTHER COMPANY

A company registered under section 8 of the act can convert itself into a company of any other class or kind. To convert, the company needs to comply with the below mentioned procedure.

A company registered under section 8 which intends to convert itself into a company of any other kind shall pass a special resolution at a general meeting for approving such conversion.

The explanatory statement annexed to the notice convening the general meeting shall set out in detail the reasons for opting for such conversion including the following:

• Date of incorporation of the company.
• The principal objects of the company as set out in the memorandum of association.
• Reasons as to why the activities for achieving the objects of the company cannot be carried on in the current structure i.e. as a section 8 company.
• If the principal/main objects of the company are proposed to be altered, what would be the altered objects and the reasons for the alteration.
• What are the privileges/concessions currently enjoyed by the company, such as tax exemptions, approvals for receiving donations/contributions including foreign contributions, land and other immovable properties, if any, that were acquired by the company at concessional rates/prices or gratuitously and, if so, the market prices prevalent at the time of acquisition and the price that was paid by the company, details of any donations or bequests received by the company with conditions attached to their utilization etc.
• What would be the impact of the proposed conversion on the members of the company including details of any benefits that may accrue to the members as a result of the conversion.

A certified true copy of the special resolution along with a copy of the Notice convening the meeting including the explanatory statement shall be filed with the Registrar in Form No. MGT.14 along with the fee as provided in Companies (Registration, Offices and Fees) Rules, 2014 and then the company shall file an application in Form No. INC.18 with the Regional Director with the fee as provided in Companies (Registration, Offices and Fees) Rules, 2014 along with a certified true copy of the special resolution and a copy of the Notice convening the meeting including the explanatory statement for approval for converting itself into a company of any other kind and a copy of the same application shall also be filed with the Registrar.

The company shall, within a week from the date of submitting the application to the Regional Director, publish a notice at its own expense, and a copy of the notice, as published, shall be sent forthwith to the Regional Director. The said notice shall be in Form No. INC.19 and shall be published.

• At least once in a vernacular newspaper in the principal vernacular language of the district in which the registered office of the company is situated, and having a wide circulation in that district, and at least once in English language in an English newspaper having a wide circulation in that district.
• on the website of the company, if any, and as may further be notified/directed by the Central Government.

– The company shall send a copy of the notice, simultaneously with its publication, together with a copy of the application and all attachments by registered post or hand delivery, to the Chief Commissioner of Income Tax having jurisdiction over the company, Income Tax Officer who has jurisdiction over the company, the Charity Commissioner, the Chief Secretary of the State in which the registered office of the company is situated, any organization or Department of the Central Government or State Government or other authority under whose jurisdiction the company has been operating. If any of these authorities wish to make any representation to the Regional Director, it shall do so within sixty days of the receipt of the notice.

– Copy of proof of serving such notice shall be attached to the application.

– The Board of directors shall give a declaration to the effect that no portion of the income or property of the company has been or shall be paid or transferred directly or indirectly by way of dividend or bonus or otherwise to persons who are or have been members of the company or to any one or more of them or to any persons claiming through any one or more of them.

Where the company has obtained any special status, privilege, exemption, benefit or grant(s) from any authority such as Income Tax Department, Charity Commissioner or any organization or Department of Central Government, State Government, Municipal Body or any recognized authority, a “No Objection Certificate” must be obtained, if required under the terms of the said special status, privilege, exemption, benefit or grant(s) from the concerned authority and filed with the Regional Director, along with the application.

The company should have filed all its financial statements and Annual Returns up to the financial year preceding the submission of the application to the Regional Director and all other returns required to be filed under the Act up to the date of submitting the application to the Regional Director and in the event the application is made after the expiry of three months from the date of preceding financial year to which the financial statement has been filed, a statement of the financial position duly certified by chartered accountant made up to a date not preceding thirty days of filing the application shall be attached.

The company shall attach with the application a certificate from practicing Chartered Accountant/ Company Secretary in practice/ Cost Accountant certifying that the conditions laid down in the Act and these rules relating to conversion of a company registered under section 8 into any other kind of company, have been complied with.

The Regional Director may require the applicant to furnish the approval or concurrence of any particular authority for grant of his approval for the conversion.

On receipt of the application, and on being satisfied, the Regional Director shall issue an order approving the conversion of the company into a company of any other kind subject to such terms and conditions as may be imposed in the facts and circumstances of each case including the following conditions:

• The company shall give up and shall not claim, with effect from the date its conversion takes effect, any special status, exemptions or privileges that it enjoyed by virtue of having been registered under the provisions of section 8;
• If the company had acquired any immovable property free of cost or at a concessional cost from any government or authority, it may be required to pay the difference between the cost at which it acquired such property and the market price of such property at the time of conversion either to the government or to the authority that provided the immovable property;
• Any accumulated profit or unutilized income of the company brought forward from previous years shall be first utilized to settle all outstanding statutory dues, amounts due to lenders claims of creditors, suppliers, service providers and others including employees and lastly any loans advanced by the promoters or members or any other amounts due to them and the balance, if any, shall be transferred to the Investor Education and Protection Fund within thirty days of receiving the approval for conversion; Before imposing the conditions or rejecting the application, the company shall be given a reasonable opportunity of being heard by the Regional Director.

 

On receipt of the approval of the Regional Director

The company shall convene a general meeting of its members to pass a special resolution for amending its memorandum of association and articles of association as required under the Act consequent to the conversion of the section 8 Company into a company of any other kind and thereafter shall file with the registrar a certified copy of the approval of the Regional Director within thirty days from the date of receipt of the order in Form No. Inc.20 along with the following documents:-

 

• Amended e-memorandum of association and e-articles of association of the company.
• A declaration by the directors that the conditions, if any imposed by the Regional Director have been fully complied with.

On receipt of the required documents, the Registrar shall register the documents and issue the fresh Certificate of Incorporation.

 

CONVERSION OF ANY OTHER CLASS OF COMPANY INTO SECTION 8 COMPANY

 

A Limited Company, Subject to some conditions is allowed to convert itself into Section 8 Company in terms of provisions contained under Section 8(5) of the Companies Act, 2013. To convert, the company needs to comply with the below mentioned procedure  

The new set of Memorandum of Association (in e-form INC-13) and Articles of Association should be adopted by passing Special Resolution in the Extraordinary General Meeting (EGM) after proposing it in the Board Meeting by passing Board Resolution.

A certified true copy of the special resolution along with a copy of the Notice convening the meeting including the explanatory statement shall be filed with the Registrar in Form No. MGT.14 along with the fee as provided in Companies (Registration, Offices and Fees) Rules, 2014 and then the company shall file an application in Form No. INC.12 with the ROC with the fee as provided in Companies (Registration, Offices and Fees) Rules, 2014 along with a certified true copy of the special resolution and a copy of the Notice convening the meeting including the explanatory statement for approval for converting itself into a Section 8 Company and a copy of the same application shall also be filed with the Registrar.

• the e-Memorandum of Association and e-Articles of Association of the company;
• the declaration by an Advocate, a Chartered Accountant, Cost Accountant or Company Secretary in Practice, that the memorandum and articles of association have been drawn up in conformity with the provisions of section 8 of the Act and rules made thereunder and that all the requirements of the Act and the rules made thereunder;
• a statement showing in detail the assets (with the values thereof), and the liabilities of the company, as on the date of the application or within thirty days preceding that date;
• the certified copy of the resolution passed in general or board meetings approving registration of the company under section 8 of the Act; and
• a declaration by each of the persons making the application

 

Further as per form INC -12, the following would also be required

• Estimation of future income and expenditure for the next three years

 

The company shall, within a week from the date of submitting the application to the Registrar, publish a notice at its own expense, and a copy of the notice, as published, shall be sent forthwith to the Registrar. The said notice shall be in Form No. INC.26 and shall be published.

• At least once in a vernacular newspaper in the principal vernacular language of the district in which the registered office of the company is situated, and having a wide circulation in that district, and at least once in English language in an English newspaper having a wide circulation in that district.
• on the website of the company, if any, and as may further be notified/directed by the Central Government.

The license for Section 8 Company shall be issued by ROC in INC-16 or INC-17, as the case may be.

• The Registrar may direct the company to insert in its MOA/AOA, such conditions of the license, as may be specified in this behalf.

EXEMPTIONS TO SECTION 8 COMPANIES UNDER COMPANIES ACT 2013
(vide Notification dated 05.06.2015)

 

•  Provision of Section 2(24) relating to Company Secretary shall not apply to   Section 8 Company
• The provision given under Section 2(68) and 2(71) relating to requirement of minimum paid up share capital of Private Company and Public Company respectively shall not apply to Section 8 Company.
• A general Meeting of Section 8 Company may be called by giving not less than clear fourteen days’ notice.
• In sub section 2 of section 96, the following clause has been added before the explanation and after the proviso:

“Provided further that the time, date and place of each annual general meeting are decided upon beforehand by the board of directors having regard to the directions, if any, given in this regard by the company in its general meeting.

• The provision contained under Section 118 relating to Minutes of proceedings of general meeting, meeting of Board of Directors and other meeting and resolutions passed by postal ballot shall not be applicable to Section 8 Company.

Except that minute, may be recorded within thirty days the conclusion of every meeting in case of Companies where the articles of association provide for confirmation of minute by circulation.

• A copy of the financial statements, including consolidated financial statements, if any, auditor’s report and every other document required by law to be annexed or attached to the financial statements, which are to be laid before a company in its general meeting, shall be sent to every member of the company, to every trustee for the debenture-holder of any debentures issued by the company, and to all persons other than such member or trustee, being the person so entitled, not less than fourteen days before the date of the meeting
• Provision Contained under Section 149(1) and first proviso to Subsection (1) which is relating to minimum and maximum number of Directors in a Company shall not applicable to Section 8 Company.
• Provision Contained under following:
• Section 149(4) relating to number of Independent Directors
• Section 149(5) relating to time period provided for compliance of Section 149(4)
• Section 149(6) relating to definition of Independent director
• Section 149(7) relating to declaration by Independent director
• Section 149(8) relating to Compliance of provision specified under Schedule IV
• Section 149(9) relating to remuneration of Independent director
• Section 149(10) and 149(11) relating to term of Independent director
• Section 149(12)(i) relating to liability of Independent director
• Section 149(13) relating to non-applicability of section 152(6) and 152(7) to appointment of Independent director

Shall not be applicable to Section 8 Company

 

• The provision contained under Section 150 relating to Manner of Selection of Independent director shall not be applicable to Section 8 Company.
• Provision contained under Section 152(5) relating to Consent of director to hold the office as director shall not be applicable to Section 8 Company.
• Provision contained under Section 160 relating to the right of persons other than retiring director to stand for directorship shall not be applicable to Section 8 Company whose articles provide for election of directors by ballot.
• Provision contained under Section 165(1) relating to the number of directorships.
• Provision contained under Section 173(1) relating to Meetings of Board shall apply to the extent that the Board of Directors of Section 8 Company shall hold at least one meeting within every six calendar months.
• The quorum for meetings of the Board shall be either eight members or twenty five percent of its total strength whichever is less.

Provided that the quorum shall not be less than two members

• The provision contained under Section 177(2) relating to” independent directors forming a majority in Audit Committee” shall not be applicable to Section 8 Company.
• The provisions contained under Section 178 relating to the Nomination and Remuneration Committee and Stakeholders Relationship Committee shall not be applicable to Section 8 Company.
• The Board may decide the following matters by circulation instead of at meeting:

(i) to borrow monies

(ii) to invest the funds of the Company

(iii) to grant loans or give guarantee or provide security in respect of loans

• The provision contained under Section 184(2) relating to disclosure of interest by director shall apply only if the transaction with reference to section 188 on basis of terms and conditions of the contract or arrangement exceeds one lakh rupees
• The provision contained under Section 189 relating to register of contracts or arrangements in which directors are interested shall apply only if the transactions with reference to Section 188 on the basis of terms and conditions of the contract or arrangement exceeds one lakh rupees.

PENAL PROVISIONS

 

Applicable Provisions: Section 8 and 447 of the Act

Sub-section (11) of the section 8 of the act states that if a company makes any default in complying with any of the requirements laid down in this section, the company shall, without prejudice to any other action under the provisions of this section, be punishable with fine which shall not be less than ten lakh rupees but which may extend to one crore rupees and the directors and every officer of the company who is in default shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to twenty-five lakh rupees, or with both:

Provided that when it is proved that the affairs of the company were conducted fraudulently, every officer in default shall be liable for action under section 447 of the Act.

******

 

INTRODUCTION

The company must have a Board of Directors for the smooth functioning of its affairs. It is the directors under whose supervision, the management team, run the business affairs of the company. A Director may act as Executive or non-executive director of the company.

As per Companies Act, 2013 (Act), a company shall have minimum number of three directors in the case of a public company, two Directors in the case of a private company, and one director in the case of a One Person Company. There shall be a maximum of fifteen directors and that number can be increased beyond fifteen, by passing members special resolution.

Every company shall have at least one resident director who has stayed in India for a total period of not less than one hundred and eighty-two days during the financial year. For the newly incorporated companies for the first financial year the duration will be counted proportionally at the end of the financial year.

In respect of some specified class of companies’ independent director and women director are required to be appointed on the board. In case of the appointment of independent director in General Meeting, an explanatory statement for such appointment should also be annexed with Notice for calling of General Meeting shall include a statement that in the opinion of the board for the fulfillment of the conditions specified in the Act.

An independent director will be appointed for the term for the five years and shall be reappointed after passing the special resolution in General Meeting. The retirement and rotation of the directors does not apply to the Independent Director.

 

1. Appointment of Directors

(Applicable Provisions: Section 149,152,153,154,155,156,157, 158,161 of the Companies Act read with Rule 8, 9, 10, 11 and 12 of Companies (Appointment and Qualification of directors) Rules, 2014)

Every company needs to have Directors to run the affairs of the company in the prescribed manner.

At the time of incorporation of a company, if no provision is made in the articles of a company for the appointment of the first director, the subscribers to the memorandum who are individuals shall be deemed to be the first directors of the company until the directors are duly appointed and in case of a One Person Company an individual being member shall be deemed to be its first director until the director or directors are duly appointed by the member in accordance with the provisions of this section 152.

If the paid-up share capital of the company is 100 crore rupees or more or turnover of 300 crore rupees or more, it is required to appoint at least one-woman director on its Board. And if provisions of CSR is applicable to the company it is also required to have at least one independent director to be part of the CSR committee.

As per section 149(4) of the Companie Act, 2013 and rule 4 of Companies (Appointment and qualifications of directors) Rules 2014, in case of listed public company there shall be at least one third of the total directors to be independent director (while calculation any fraction to be rounded of to one). And in case of unlisted public company, it shall have at least two independent directors if any of the following conditions attracted: 1) Paid-up Share Capital of minimum ten crore or 2) Turnover of minimum 100 crore or 3) aggregate, outstanding loans, debentures and deposits, exceeding fifty crore rupees:

It should be noted that every director shall be appointed by the company in general meeting except the cases where power has been given to the Board expressly under section 161 of the Companies Act 2013 i.e. Appointment of Additional director, Alternate director and Nominee director, Casual vacancy director.

Every person proposed to be appointed as a director by the company in general meeting or otherwise, shall furnish his Director Identification Number and a declaration that he is not disqualified to become a director under this Act.

In the case of appointment of an independent director in the general meeting, an explanatory statement for such appointment, annexed to the notice for the general meeting, shall include a statement that in the opinion of the Board, he fulfills the conditions specified in this Act for such an appointment.

A person appointed as a director shall not act as a director unless he gives his consent in writing to hold the office as director to the company in Form No. DIR.2 and such consent has been filed with the Registrar within thirty days of his appointment in Form No. DIR.12 along with the fee as provided in Companies (Registration of Offices and Fees) Rules, 2014.

As per section 152(6) Unless otherwise the Articles provide the two third of the total numbers of the directors of the public company will be liable to be retire by rotation (any fraction while calculation shall be rounded off to 1). One third of rotational director shall retire by rotation at every annual general meeting (while calculation any fraction rounded off to the nearest integer). The directors to retire by rotation at every annual general meeting shall be those who have been longest in office since their last appointment, but if directors appointed on the same day, then the retirement will take place by mutual agreement between them and in its absence by lottery method.

For calculation of the number of the directors liable to be retire by rotation, the ‘Total number of the directors’ shall not include the independent director.

2. Appointment of additional director, alternate director and nominee director

(Applicable Provisions: Section 161 of the Act)

The articles of a company may confer on its Board of Directors the power to appoint any person, other than a person who fails to get appointed as a director in a general meeting, as an additional director at any time who shall hold office up to the date of the next annual general meeting or the last date on which the annual general meeting should have been held, whichever is earlier. Board of Directors of a company may appoint any person as an additional director, who shall hold office up to the date of next annual general meeting.

The Board of Directors of a company may, if so authorized by its articles or by a resolution passed by the company in general meeting, appoint a person, not being a person holding any alternate directorship for any other director in the company, to act as an alternate director for a director during his absence for a period of not less than three months from India. It is also important to note that no person shall be appointed as an alternate director for an independent director unless he is qualified to be appointed as an independent director under the provisions of this Act.

Board may appoint any person as a director nominated by any institution in pursuance of the provisions of any law for the time being in force. The articles of company should allow the appointment of nominee director. Subject to the articles of a company, the Board may appoint any person as a Director nominated by any institution in pursuance of the provisions of any law for the time being in force or of any agreement or by the Central Government or the State Government by virtue of its shareholding in a Government company.

In the case of a public company, if the office of any director appointed by the Company in general meeting is vacated before his term of office expires in the normal course, the resulting casual vacancy may, in default of and subject to any regulations in the articles of the company, be filled by the Board of Directors at a meeting of the Board: Provided that any person so appointed shall hold office only up to the date up to which the director in whose place he is appointed would have held office if it had not been vacated.

A person appointed shall not act as a director unless he gives his consent in writing to hold the office as director to the company in Form No. DIR.2 and such consent have been filed with the Registrar within thirty days of his appointment in Form No. DIR.12 along with the fee as provided in Companies (Registration of Offices and Fees) Rules, 2014.     

3. Disclosure of Director’s Interest

(Applicable Provisions: Section 184(1) of the act read with Rule 9(1) of Companies (Meeting of Board & its Powers) Rules, 2014)

         Every director shall at the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in the disclosures already made, then at the first Board meeting held after such change, disclose his concern or interest in any company or companies or bodies corporate, firms, or other association of individuals which shall include the shareholding, in FORM MBP-1.

4. Intimation by Director

(Applicable Provisions: Section 164(2) of the act read with Rule 14 (1) of Companies (Appointment and Qualification of directors) Rules, 2014)

Every director before his appointment and re-appointment shall inform the company concerned     about his disqualification under sub-section (2) of section 164, if any, in Form DIR-8.

Whenever a company receives the information in Form DIR-8, company shall, within thirty days of such receipt, file Form DIR-9 with the Registrar.

5. Resignation of Director

(Applicable Provisions: Section 167 and 168 of the act read with Rule 15 and 16 of Companies (Appointment and Qualification of directors) Rules, 2014)

 

A director may resign from its office by giving a notice with the reasons of resignation in writing to the company. The company shall intimate the same to the Registrar of companies in Form No. DIR.12 within thirty days from the date of receipt of notice of resignation from the director and post the information on its website, if any. The resigning Director may also inform the reason of resignation to registrar in Form DIR-11 within thirty days from the date of his resignation.

 

Where all the directors of a company resign from their offices or vacate their offices under section 167 of the Act, the promoter or, in his absence, the Central Government shall appoint the required number of directors who shall hold office till the directors are appointed by the company in general meeting.

The company shall also place the fact of such resignation in the report of the board of directors to be laid down at the immediately following general meeting of the company.

In case a company has already filed Form DIR-12 with the Registrar, a foreign director of such company resigning from his office may authorize in writing a practicing chartered accountant or cost accountant in practice or company secretary in practice or any other resident director of the company to sign Form DIR-11 and file the same on his behalf intimating the reasons for the resignation.

6. Vacation of office of director

(Applicable Provisions: Section 164 and 167 of the Act.)

The office of a director shall become vacant in case:-

(a)    He incurs any of the disqualifications specified in section 164, which are as below:

• he is of unsound mind and stands so declared by a competent court.
• he is an undischarged insolvent.
• he has applied to be adjudicated as an insolvent and his application is pending.
• he has been convicted by a court of any offence, whether involving moral turpitude or otherwise, and sentenced in respect thereof to imprisonment for not less than six months and a period of five years has not elapsed from the date of expiry of the sentence:

And if a person has been convicted of any offence and sentenced in respect thereof to imprisonment for a period of seven years or more, he shall not be eligible to be appointed as a director in any company.

• an order disqualifying him for appointment as a director has been passed by a court or Tribunal and the order is in force.
• he has not paid any calls in respect of any shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call;
• he has been convicted of the offence dealing with related party transactions under section 188 at any time during the last preceding five years; or
• he has not complied with sub-section (3) of section 152 relating to holding of Directors Identification number.
• A private company may by its articles provide for any disqualifications for appointment as a director in addition to those specified above.

(b)    He is absents himself from all the meetings of the Board of Directors held during a period of twelve months with or without seeking leave of absence of the Board.

(c)    He acts in contravention of the provisions of section 184 relating to entering into contracts or arrangements in which he is directly or indirectly interested.

(d)    He fails to disclose his interest in any contract or arrangement in which he is directly or indirectly interested, in contravention of the provisions of section 184.

(e)    He becomes disqualified by an order of a court or the Tribunal.

(f)     He is convicted by a court of any offence, whether involving moral turpitude or otherwise and sentenced in respect thereof to imprisonment for not less than six months.

Provided that the office shall not be vacated by the director in case of orders referred to in clauses (e) and (f)-

(i) for thirty days from the date of conviction or order of disqualification.

(ii) where an appeal or petition is preferred within thirty days as aforesaid against the conviction resulting in sentence or order, until expiry of seven days from the date on which such appeal or petition is disposed of: or

(iii) where any further appeal or petition is preferred against order or sentence within seven days, until such further appeal or petition is disposed of.]

(g)    He is removed in pursuance of the provisions of this Act.

(h)    He, having been appointed a director by virtue of his holding any office or other employment in the holding, subsidiary or associate company, ceases to hold such office or other employment in that company.

A private company may, by its articles, provide any other ground for the vacation of the office of a director in addition to these.

The company has to take the note of the same and hold the board meeting and consider the occurrence of the case/es mentioned in sub-section (1) of the Section 167 and file the form for change in board of director in the Form No. DIR.12 with the Registrar of the companies along with the fee as provided in Companies (Registration of Offices and Fees) Rules, 2014

Where all the directors of a company vacate their offices under any of the disqualifications specified above, the promoter or, in his absence, the Central Government shall appoint the required number of directors who shall hold office till the directors are appointed by the company in the general meeting.

7. Removal of Director

(Applicable Provisions: Section 169 of the Act.)

A company may by passing ordinary resolution in general meeting remove a director other than the director appointed by National Company Law Tribunal under section 242 and the director appointed by way of proportional representation under section 163 of the Companies Act, 2013.

Further to be noted that an independent director appointed for the second term can be by passing special resolution in the general meeting. The company shall give the opportunity of being heard to a director being removed.

(Concept of special notice to remove the director)

Special notice is required to remove the director or to appoint somebody in his place. On receipt of notice of a resolution to remove a director, the company shall forthwith send a copy thereof to the director concerned, and the director, whether or not he is a member of the company, shall be entitled to be heard on the resolution at the meeting. The company shall issue notice for holding general meeting of shareholders and the representation if any received from the director, to be removed, may also be sent with notice if time allowed to do so and if a copy of the representation is not sent as aforesaid due to insufficient time or for the company’s default, the director may without prejudice to his right to be heard orally require that the representation shall be read out at the meeting.

 

copy of the representation need not be sent out and the representation need not be read out at the meeting if, on the application either of the company or of any other person who claims to be aggrieved, the tribunal is satisfied that the rights conferred to director are being abused to secure needless publicity for defamatory matter; and the tribunal may order the company’s costs on the application to be paid in whole or in part by the director notwithstanding that he is not a party to it.

The Company shall, within 30 days of passing of resolution, intimate the Registrar in Form No. DIR.12 along with such fee as may be provided in Companies (Registration of Offices and Fees) Rules, 2014 and post the information on its website, if any.

A vacancy created by the removal of a director, if he had been appointed by the company in general meeting or by the Board, be filled by the appointment of another director in his place at the meeting at which he is removed, provided special notice of the intended appointment has been given.

Here in this article, provisions relating to Appointment, Resignation and Removal of company directors has been discussed and summed up. Hope the article will be helpful to the readers and will help them in compliance of the related provisions.

 

The management of the affairs of a company is vested with the Board of Directors. Subject to the restriction of the Companies Act, the Board can delegate any of its authority to its subordinate committee or any other individual. Here, in this article, we will discuss the Roles, Responsibilities and Powers of the Board of Directors as enumerated in the Companies Act.

 

MEETINGS OF BOARD OF DIRECTORS

 

       {APPLICABLE PROVISIONS: Section 173 and 175 of the Act read with rule 3, 4 and 5 of Companies (Meetings of Board and its Powers) Rules, 2014 and Secretarial Standard-1}

 

Meeting: Important Deadlines

 

Every Company shall hold the first meeting of the Board of Directors within thirty days of the date of its incorporation except in case of One Person Company and shall hold a minimum number of four meetings of its Board of Directors every year in such a manner that not more than one hundred and twenty days shall intervene between two consecutive meetings of the Board.

 

One Person Company, Small Companies and Dormant Companies are required to conduct one meeting in each half of the Calendar year and the gap between the two meetings should not be less than Ninety days.

 

Quorum and Adjournment provisions

 

The quorum for a meeting of the Board of Directors of a company as prescribed by Section 174 of the Companies Act 2013 shall be one third of its total strength or two directors, whichever is higher, but if the Articles of Association of a Company prescribe a higher strength of Quorum, then the requirements of the Quorum shall be subject to the Articles of Association. The participation of the directors by video conferencing or by other audio visual means shall also be counted for the purposes of quorum and if  a meeting of the board could not be held for want of quorum, then, unless the articles of the company otherwise provide, the meeting shall automatically stand adjourned to the same day at the same time and place in the next week or if that day is a national holiday, till the next succeeding day, which is not a national holiday, at the same time and place.

The quorum should be ascertained before starting the meeting for valid transaction of the business to be discussed at the meeting. And any fraction of a number shall be rounded off & deemed as one and Quorum shall be present not only at the time of commencement of the Meeting but also while transacting business.

Director shall not be counted for Quorum in respect of an item in which he is interested, and he shall not be present, whether physically or through Electronic Mode, during discussions and voting on such item.

 

Calling of the Meeting: Notice & Agenda

 

A meeting of the Board shall be called by giving not less than seven days’ notice in writing to every director at his address registered with the company and such notice shall be sent by hand delivery or by post or by electronic means

In case the company sends the Notice by speed post or by registered post or by courier, an additional two days shall be added for the service of Notice.

The Agenda, setting out the business to be transacted at the Meeting, and Notes on Agenda shall be given to the Directors at least seven days before the date of the Meeting, unless the Articles prescribe a longer period. (SS-1)

To transact urgent business, the Notice, Agenda and Notes on Agenda may be given at a shorter period of time than stated above, if at least one Independent Director, if any, shall be present at such Meeting.

 

If no Independent Director is present, decisions taken at such a Meeting shall be circulated to all the Directors and shall be final only on ratification thereof by at least one Independent Director, if any and In case the company does not have an Independent Director, the decisions shall be final only on ratification thereof by a majority of the Directors of the company, unless such decisions were approved at the Meeting itself by a majority of Directors of the company. (SS-1)

 

Participation through Video Conferencing: Keeping up on the Technological Front.

 

The Board of Directors can Participate in the Meeting of board of Directors either himself or through video conferencing or other audio-visual means, as prescribed under the act, which are capable of recording and recognizing the participation of the directors and of recording and storing the proceedings of such meetings along with date and time.

 

And the Central Government may, by notification, specify such matters which shall not be dealt with in a meeting through video conferencing or other audio-visual means.

 

Every director of the company shall attend at least one Board meeting in the financial year           of the company.

The office of a Director shall become vacant in case the Director absents himself from all the Meetings of the Board held during a period of twelve months with or without seeking leave of absence of the Board. (SS-1)

Disclosure of Interest (Section 184)

Every director shall disclose his concern or interest in any company or companies or bodies corporate (including shareholding interest), firms or other association of individuals, by giving a notice in writing in Form No. MBP-1

 

Secretarial Standards: Applicability

 

Every company shall observe Secretarial Standards with respect to General and Board Meetings specified by ICSI and approved by the Central Government. Duty is cast on the Company Secretary to ensure that the company complies with the applicable Secretarial Standards.

 

POWERS OF THE BOARD

 

{APPLICABLE PROVISIONS: Section 179 of the Act read with rule 8 of Companies (Meetings of Board and its Powers) Rules, 2014}

 

Discretion of the Board

The Board of Directors of a company shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorized to exercise and do but in exercising such power or doing such act or thing, the Board shall be subject to the provisions contained in that behalf in the Act, or in the memorandum or articles, or in any regulations not inconsistent therewith and duly made there under, including regulations made by the company in general meeting but the Board shall not exercise any power or do any act or thing which is directed or required, whether under the Companies Act or by the memorandum or articles of the company or otherwise, to be exercised or done by the company in general meeting only. And no regulation made by the company in general meeting shall invalidate any prior act of the Board which would have been valid if that regulation had not been made.

 

Powers to be exercised by Board only at meeting

The Act mandates that the Board of directors of a company shall exercise the following powers on behalf of the company, and it shall do so only by means of resolutions passed at meetings of the Board: –

1. The power to make calls on shares holders in respect of money unpaid on their shares
2. To authorize buy-back of securities under section 68
3. The power to issue securities, including debentures
4. The power to borrow monies
5. The power to invest the funds of the company
6. The power to grant loans or give guarantee or provide security in respect of loans
7. To approve financial statement and the Board’s Report
8. To diversify the business of the company
9. To approve amalgamation, merger or reconstruction
10. To take over a company or acquire a controlling or substantial stake in another company
11. To make political Contribution
12. To Appoint or Remove KMP
13. To Appoint or remove Internal and Secretarial Auditor

 

       Delegation of Authority

However, the Board may, by a resolution passed at a meeting delegate to any committee of directors, the managing director, or the manager of the company or any other principal officer of the company or in the case of a branch office of the company, a principal officer of the branch office, the powers specified in clauses d, e and f to the extent specified in the resolution and subject to such conditions as may be imposed

 

RESTRICTIONS ON POWERS OF BOARD

 

{APPLICABLE PROVISIONS: Section 180 of the Act read with Rule 9 of Companies (Meetings of Board and its Powers) Rules, 2014}

 

The board of directors is empowered to run the affairs and business of the company in a free manner, but the Companies Act puts certain restrictions on the powers of the Board.

As per the provisions of the Act, the Board of Directors of a company shall exercise the following powers only with the consent of the company by a special resolution, namely: –

1. To sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company or where the company owns more than one undertaking, of the whole or substantially the whole of any of such undertakings.
2. To invest otherwise in trust securities the amount of compensation received by it as a result of any merger or amalgamation.
3. To borrow money, where the money to be borrowed, together with the money already borrowed by the company will exceed aggregate of its paid-up share capital and free reserves, apart from temporary loans obtained from the company’s bankers in the ordinary course of business but the acceptance by a banking company, in the ordinary course of its business, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise, shall not be deemed to be a borrowing of monies by the banking company within the meaning of this clause.
4. To remit, or give time for the repayment of, any debt due from a director.

 

Every special resolution passed by the Company in general Meeting in relation to the exercise of the powers referred to in Clause 9(c) of sub section (1) of section 180 shall specify the total amount up to which monies may be borrowed by the Board of directors.

 

Resolution by Circulation

 

The Act requires certain business to be approved only at Meetings of the Board. However, other businesses that require urgent decisions can be approved by means of Resolutions passed by circulation. Resolutions passed by circulation are deemed to be passed at a duly convened Meeting of the Board and have equal authority.

No resolution shall be deemed to have been duly passed by the Board or by a committee thereof by circulation, unless the resolution has been circulated in draft, together with the necessary papers, if any, to all the directors, or to all the members of the committee, then in India (not being less in number than the quorum fixed for a meeting of the Board of committee, as the case may be), and to all other directors or members at their usual address in India, and has been approved by such of the directors as are then in India, or by a majority of such of them, as are entitled to vote on the resolution.

The Resolution is considered as passed when it is approved by a majority of the Directors entitled to vote on the Resolution, unless not less than one-third of the total number of Directors for the time being require the Resolution under circulation to be decided at a Meeting.

The Resolution, if passed, shall be deemed to have been passed on the last date specified for signifying assent or dissent by the Directors or the date on which assent from more than two-third of the Directors has been received, whichever is earlier, and shall be effective from that date, if no other effective date is specified in such Resolution.

 

As per SS-1, following is the Illustrative list of items of business which shall not be         passed by circulation and shall be placed before the Board at its Meeting

 

General Business Items

 

• Noting Minutes of Meetings of Audit Committee and other Committees.
• Approving financial statements and the Board’s Report.
• Considering the Compliance Certificate to ensure compliance with the provisions of all the laws applicable to the company.
• Specifying list of laws applicable specifically to the company.
• Appointment of Secretarial Auditors and Internal Auditors.

 

Specific Items

• Borrowing money otherwise than by issue of debentures.
• Investing the funds of the company.
• Granting loans or giving guarantee or providing security in respect of loans.
• Making political contributions.
• Making calls to shareholders in respect of money unpaid on their shares.
• Approving Remuneration of Managing Director, Whole-time Director and Manager.
• Appointment or Removal of Key Managerial Personnel.
• Appointment of a person as a Managing Director / Manager in more than one company.
• Appointment of Director(s) in casual vacancy subject to the provisions in the Articles of the company. To be subsequently approved in the immediate next general meeting.
• According sanction for related party transactions which are not in the ordinary course of business, or which are not on an arm’s length basis.
• Purchase and Sale of subsidiaries/assets which are not in the normal course of business.
• Approve Payment to Director for loss of office.
• Items arising out of separate meeting of the Independent Directors if so, decided by the Independent Directors.

 

Corporate Actions

• Authorize Buy Back of securities
• Issue of securities, including debentures, whether in or outside India.
• Approving amalgamation, merger or reconstruction.
• Diversify the business.
• Takeover another company or acquire controlling or substantial stake in another company.

 

For any queries and legal opinions please contact: 

J. K. Gupta & Associates

257, Vardhaman City Center,

Gulabi Bagh, Near Shakti

Nagar Railway Under Bridge

New Delhi-110052

Phone No- 9953887741/ 9310557569

Email Id: – cs@jkgupta.com

RELATED PARTY TRANSACTIONS: LEGAL PROVISIONS & COMPLIANCE

Applicable Provisions: Section 2(76), 2(77) & 188 of the Companies Act read with Rule 15 of Companies (Registration Offices and Fees) Rules, 2014 And Regulation 23 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015

 

INTRODUCTION

The Act puts some restriction on the related party transactions. With the introduction of The Companies Act, 2013, the scope and ambit of related party transactions has significantly enlarged. The Companies Act, 1956 covered only purchase or sale of goods or supply of services and subscription of any shares or debentures of the company under the related party transaction. However, Companies Act, 2013 has brought immovable properties and leasing of property also under the ambit of related party transaction.

The Companies Act, 2013 has removed central government approvals for related party transaction which was mandatory under the Companies Act, 1956 for companies having paid-up share capital of rupees one crore or more.

We will start from the definition of related party, which has been prescribed under the Act.

Definition of Related party:-

The word “related party” is defined in Section 2(76) of the Companies Act, 2013 as follows:

I. a director or his relative;

II. a key managerial personnel or his relative;

III. a firm, in which a director, manager or his relative is a partner;

IV. a private company in which a director or manager or his relativeis a member or director;

V. a public company in which a director or manager is a director andholds, along with his relatives, more than two per cent. of its paid-up share capital;

VI. any body corporate whose Board of Directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager;

VII. any person on whose advice, directions or instructions a director or manager is accustomed to act:

Provided that nothing in sub-clauses (VI) and (VII) shall apply to the professional advice, directions or instructions.

VIII.   any company which is—

• a holding, subsidiary or an associate company of such company; or
• a subsidiary of a holding company to which it is also a subsidiary;
• an investing company or the venturer of the company;

 

Explanation.—For the purpose of this clause, “the investing company or the venturer of a company” means a body corporate whose investment in the company would result in the company becoming an associate company of the body corporate.]

MCA vide exemption Notification dated 5^th July, 2015 exempted private companies    from clause (viii) of Section 2(76) for the purpose of Section 188 of the Act.

After this exemption notification in case of private companies holding, subsidiary or     associate companies will not be related parties for the purpose of Section 188     unless they fall any other category as specified in Section 2(76).

1. such other person as may be prescribed;

As per Rule 3 of Companies (Specification of definitions details) Rules, 2014} for the purposes of above-mentioned sub-clause (IX) a director (other than an Independent Director) or KMP of the holding company or his relative with reference to a company, shall be deemed to be a related party.

 

As per section 2(77) of The Companies Act,2013,” relative”  with reference to any person, means any one who is related to another, if—

• they are membersof a Hindu Undivided Family;
• they are husband and wife; or
• he or she is related to another in the following manner, namely:
• Father including step- father
• Mother including step- mother
• Son including step- son
• Son’s wife
• Daughter
• Daughter’s husband
• Brother including step- brother
• Sister including step- sister

 

Special note for Listed Entities: as per Regulation 2(1)(zb) of SEBI ( Listing Obligations & Disclosure Requirements) related party means:

• related party as defined under sub-section (76) of section 2 of the Companies Act, 2013 ;or
• related party under the applicable accounting standards

As per SEBI (LODR) (sixth amendment) Regulations 2021, in clause (zb), the first proviso shall be substituted with the following, namely;

Provided that:

• any person or entity forming a part of the promoter or promoter group of the listed entity; or
• any person or any entity, holding equity shares:
• of twenty per cent or more; or
• of ten per cent or more, with effect from April 1, 2023;

in the listed entity either directly or on a beneficial interest basis as provided under section 89 of the Companies Act, 2013, at any time, during the immediately preceding financial year;

shall be deemed to be a related party.

 

Provided further that this definition shall  not  be  applicable  for  the  units issued by mutual funds which are listed on a recognized stock exchange(s).

 

Requirement for Approval of Board of directors:

Section 188(1) of the Act provides that except with the consent of the Board of Directors given by a resolution at a Meeting of the Board and subject to such conditions as may be prescribed, no company shall enter into any contract or arrangement with a related party with respect to—

1. sale, purchase or supply of any goods or materials;
2. selling or otherwise disposing of, or buying, property of any kind;
3. leasing of property of any kind;
4. availing or rendering of any services;
5. appointment of any agent for purchase or sale of goods, materials, services or property;
6. such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company; and
7. Underwriting the subscription of any securities or derivatives thereof, of the company.

The agenda of the Board meeting at which the resolution is proposed to be moved shall disclose–

1. the name of the related party and nature of relationship;
2. the nature, duration of the contract and particulars of the contract or arrangement;
3. the material terms of the contract or arrangement including the value, if any;
4. any advance paid or received for the contract or arrangement, if any;
5. the manner of determining the pricing and other commercial terms, both included as part of contract and not considered as part of the contract;
6. whether all factors relevant to the contract have been considered, if not, the details of factors not considered with the rationale for not considering those factors; and
7. any other information relevant or important for the Board to take a decision on the proposed transaction.

Where any director is interested in any contract or arrangement with a related party, such director shall not be present at the meeting during discussions on the subject matter of the resolution relating to such contract or arrangement.

 

 

Requirement for Approval of the company by Ordinary resolution:

The following type of transactions require the approval of the company by passing an ordinary resolution:

 (a) As contracts or arrangements with respect to clauses (a) to (e) of sub-section (1) of section 188, with criteria as mentioned below –

1. Sale, purchase or supply of any goods or materials, directly or through appointment of agent, amounting to 10% or more of the turnover of the company, as mentioned in clause (a) and clause (e) respectively of sub-section (1) of section 188;
2. Selling or otherwise disposing of or buying property of any kind, directly or through appointment of agent, amounting to 10% or more of net worth of the company, as mentioned in clause (b) and clause (e) respectively of sub-section (1) of section 188;

iii. Leasing of property of any kind amounting to 10% or more of the turnover of the company, as mentioned in clause (c) of sub-section (1) of section 188;

1. Availing or rendering of any services, directly or through appointment of agent, amounting to 10% or more of the turnover of the company, as mentioned in clause (d) and clause (e) respectively of sub-section (1) of section 188:

Explanation.—It is hereby clarified that the limits specified in sub-clauses (i) to (iv) shall apply for transaction or transactions to be entered into either individually or taken together with the previous transactions during a financial year.

(b)  For appointment to any office or place of profit in the company, its subsidiary company or associate company at a monthly remuneration exceeding two and half lakh rupees as mentioned in clause (f) of subsection (1) of section 188; or

(c) For remuneration for underwriting the subscription of any securities or derivatives thereof, of the company exceeding 1% of the net worth as mentioned in clause (g) of sub-section (1) of section 188.

Explanation.- (1) The Turnover or Net Worth referred in the above sub-rules shall be computed on the basis of the Audited Financial Statement of the preceding Financial year.

No member of the company shall vote on such resolution, if he is a related party, to approve any contract or arrangement which may be entered into by the company. However, MCA has exempted private limited companies from this requirement vide notification dated 5th July, 2015.

Audit Committee is empowered to give omnibus approvals for related party transactions proposed to be entered into by the company subject to such conditions as may be prescribed.

And related party transactions between holding companies and wholly owned subsidiaries are exempted from the requirement of approval.

 

Further, It is important to take note of contents of the Explanatory Statement annexed to the notice of a General Meeting pursuant to Section 101. The following matters should be included in the said explanatory statement:

(a) Name of the related party ;

(b) Name of the director or key managerial personnel who is related, if any;

(c) Nature of relationship;

(d) Nature, material terms, monetary value and particulars of the contract or arrangement;

(e) Any other information relevant or important for the members to take a decision on the proposed resolution.

After the amendment of Companies (Meetings of Board and its Powers) Rules, 2014 on 14^th August, 2014 essence of related party is changed entirely. Now every company whether small or big, private or public will be required to pass ordinary resolution for related party transaction. MCA has removed paid-up capital criteria for ordinary resolution.

 

Exempted Transactions: Transactions entered into by the company in its ordinary course of business and undertaken at an arm’s length basis do not need any prior approval:  

The word “ordinary course of business” is not defined in the Companies Act, 2013 or in Rules made thereunder.

No specific criteria have been provided in the Act whether the transaction is in ordinary course or not. Whether the transaction entered is ordinary course of business or not will depend on the particular business activity of the company. Transaction in ordinary course of business will cover the usual transactions of a business and of a company.

One should consider variety of factors to determine whether the transaction is in ordinary course or not like size, volume, frequency, purpose of transaction etc.

 Meaning of Arm’s length transaction:

Arm’s length transaction means a transaction between two related parties which is conducted as if they are unrelated, so that there is no conflict of interest.

If a transaction fulfills both the criteria no approval will be required under section 188 of the Companies Act, 2013.

 

(Special Note for Listed Companies : As per Regulation 23(1) of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015

A transaction with a related party shall be considered material if the transaction / transactions to be entered into individually or taken together with previous transactions during a financial year, exceeds Rs. 1000 crores or 10% of the annual consolidated turnover of the listed company as per the last audited financial statements of the company, whichever is lower.

 

Disclosures:

Every contract or arrangement entered into under sub-section (1) of Section 188 of the Act shall be referred to in the Board’s report to the shareholders along with the justification for entering into such contract or arrangement.

 

(Special Note for Listed Companies: As per Regulation 23(9) of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015

The  listed  entity  shall  submit  to  the  stock  exchanges  disclosures  of  related  party

transactions in the format as specified by the Board from time to time, and publish the same on its website:

Provided that a

• ‘high value debt listed entity’ shall submit such disclosures along with its standalone financial results for the half year:
• Provided further that the listed entity shall make such disclosures every six months within 15 days from the date of publication of its standalone and consolidated financial results:
• Provided further that the listed entity shall make such disclosures every six months on the date of publication of its  standalone  and  consolidated  financial  results  with  effect  from April 1, 2023.

 

Applicability:

Section 188 of the Act is applicable to all kinds of companies whether private or public.

MCA issued exemption notification dated 5^th July, 2015 to give certain exemptions to private limited companies for related party transaction.

The notification does not five full exemptions to private companies but it gives exemption to private companies with some riders.

It has exempted private companies from Section 2(76)(viii) for the purpose of Section 188.

A related party can vote for ordinary resolution is case of related party transaction.

 

(Special Note for Listed Companies : As per Regulation 15(2) of The SEBI (LODR) regulations 2015, the compliance with Regulation 23 (Related party transactions) shall not apply in respect to listed entity having

• Paid up share capital not exceeding Rs. 10 crores ;and
• Net worth not exceeding Rs. 25 crores

As on the last day of the previous financial year.

Consequences of contravention & Penalty:

Where any contract or arrangement is entered into by a director or any other employee, without obtaining the consent of the Board or approval by a ordinary resolution in the general meeting-

• and if it is not ratified by the Board; or
• by the shareholders at a meeting within three months from the date on which such contract or arrangement was entered:

such contract or arrangement shall be voidable at the option of the Board or, as the case maybe of the shareholders, and if the contract or arrangement is with a related party to any director, or is authorised by any other director, the directors concerned shall indemnify the company against any loss incurred by it.

Any director or any other employee of a company, who had entered into or authorized the contract or arrangement in violation of the provisions of this section shall,—

• in case of listed company be liable to a penalty of Rs. 25 lakh ;and
• in case of any other company be liable to a penalty of Rs. 5 lakh

 

It is also important to mention that as per section 188(4) of the Companies Act, it shall be open to the company to proceed against a director or any other employee who had entered into such contract or arrangement in contravention of the provisions of this section for recovery of any loss sustained by it as a result of such contract or arrangement.

 

For any queries and legal opinions please contact: –

J. K. Gupta & Associates

257, Vardhaman City Center,

Gulabi Bagh, Near Shakti

Nagar Railway Under Bridge

New Delhi-110052

Phone No- 9953887741/ 9310557569

Email Id: – cs@jkgupta.com

 

BUY BACK OF SECURITIES

APPLICABLE PROVISIONS:

Section 68, 69 & 70 of the Companies Act, 2013 read with Rule 17 of The Companies (Share Capital & Debentures) Rules, 2014 are the provision concerned towards the Buy Back of Securities by the unlisted company; however, in addition to the companies act, 2013 the listed Company shall also comply with the SEBI (Buy Back of Securities) Regulations, 2018 as issued by Security Exchange Board of India (SEBI) in pursuance to Sec 68(2) (f) of the Companies Act, 2013.

MEANING:

Buy Back of Shares refers to the process by which a company re-purchase its shares and other specified securities from its existing shareholders at a price higher than the market price. It is a way of returning money to its investors. Buy-Back of its own shares by a company is nothing but reduction of share capital. Generally, the need for buyback arises when the management considers that the shares are undervalued or if the outstanding shares are falling.

SOURCES OF BUYBACK:

Pursuant to section 68 (1) of Companies Act, 2013, a company whether public or private, may purchase its own shares or other *specified securities* out of following sources: –

• Its free reserves; or
• The securities premium account; or
• The proceeds of the issue of any shares or other specified securities.

However, buy-back of any kind of shares or other specified securities shall not be made out of the proceeds of an earlier issue of the same kind of shares or other specified securities.

** Specified Securities includes employees stock option or other securities as may be notified by the Central Government from time to time.

Author’s Comment:

• A company cannot do buyback of debentures as debenture denotes a debt to the company and it is not included in specified securities.
• There is no such restriction for buyback of securities out of proceeds of an earlier issue of different kind of securities.

METHOD OF BUY BACK:

A company may buy-back its shares by any of the following methods:

1. From the existing shareholders or security shareholders on a proportionate basis through the tender offer; or

2. From the open market: –

2.1. Book Building process

2.2 Stock Exchange

CONDITIONS FOR BUY-BACK:

Pursuant to section 68 (2) and 68 (7) of Companies Act, 2013, no company shall purchase its own shares or other specified securities unless the following conditions are fulfilled:

• Buy-back is authorized by the Articles of Association of the Company.
• Where Board Resolution is passed buy-back can be made up to 10% or less of the total paid-up equity capital and free reserves of the company; whereas, a  Special Resolution would be required at a General Meeting of the company where the buy-back is more than 10% of the total paid-up equity capital and free reserves of the company but up to 25% or less of the aggregate of paid-up capital (equity and preference) and free reserves of the company.

Provided that in respect of the buy-back of equity shares in any financial year, the reference to 25% in this clause shall be construed with respect to its total paid-up equity capital in that financial year.

• Maximum number of shares that can be bought back in any financial year shall not exceed 25% of paid-up equity capital.
• The ratio of the aggregate of secured and unsecured debts owed by the company after buy-back cannot be more than 2:1 ratio i.e. twice the paid-up capital and its free reserves.
• All the shares or other specified securities for buy-back should be fully paid-up.
• the buy-back of the shares or other specified securities listed on any recognized stock exchange are in accordance with the regulations made by SEBI.
• The buyback in respect of shares or other specified securities not listed on any recognized stock exchange are in accordance with Companies (Share Capital and Debentures) Rules, 2014.
• No offer of Buyback under this sub section shall be made within a period of one year reckoned from the date of closure of the preceding offer of buy-back, if any.
• A Company should extinguish and physically destroy shares bought back within 7 days of completion of the buy-back

Additionally, pursuant to SEBI (Buy Back of Securities) Regulations, 2018, a listed company shall also comply with the following:

• No offer of Buyback for 25% or more of paid up capital and free reserves of the company shall be made from open market. (Based on the standalone or consolidated financial statements of the company, whichever sets out a lower amount)
• In case of Buyback from open market, company shall ensure that at least 75% of amount earmarked for buyback as specified in Board Resolution/ Special Resolution is utilized for buying back shares or other specified securities.
• In case of Buyback from open market, company shall ensure that a minimum of 40% of amount earmarked for buyback as specified in Board Resolution/ Special Resolution is utilized within the initial half of the specified duration.
• A company shall not buy-back its shares or other specified securities from any person through negotiated deals, whether on or off the stock exchange or through spot transactions or through any private arrangement.
• No insider shall deal in shares or other specified securities of the company on the basis of unpublished price sensitive information relating to buy-back of shares or other specified securities of the company.

Author’s Comment: There is no such limit of maximum 25% of paid-up capital on buyback of preference shares in any financial year.

TIME LIMIT FOR COMPLETION OF BUYBACK:

Pursuant to section 68 (4) of Companies Act, 2013, every buy-back shall be completed within one Year from the date of passing of the Special Resolution or the Board Resolution, as the case may be.

ADVANTAGES OF BUYBACK:

There are several advantages of buyback such as:

• Increase in Earnings per share: With the reduction in the number of shares in the market due to Buy Back, the earnings per share (EPS) increases Since EPS is calculated by dividing earnings by total number of outstanding shares, when the total number of shares decreases, earnings per share will increase.
• Maintaining shareholders value in a situation of poor state of secondary market by a return of surplus cash to the shareholders.
• Countering a Hostile Takeover: Buyback can be used as an effective defence strategy to prevent hostile takeover.
• Approval of NLCT not required: Company can reduce the capital of company without the approval of NCLT.
• Increase in Promoter Holding: Buyback increases the holding of promoters by purchasing back shares from their shareholders.
• Reduction in Unutilized Cash in Hand: Since the company spends cash to buys its stock, the cash assets on its balance sheets reduce. This increases the RoE (return on equity).
• Provides Exit opportunity: It enables the company to buy the shares of dissatisfied or dissenting shareholders of the company

PROHIBITION OF FURTHER ISSUE OF SHARES OR SECURITIES:

Pursuant to section 68 (8) of Companies Act, 2013, When a company completes a buy-back of its shares it shall not make a further issue of the same kind of shares within a period of six months except by way of:

• Bonus issue or
• In the discharge of subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or
• Conversion of preference shares or debentures into equity shares.

Author’s Comment: There is no restriction on issue of different kind of securities after completion of buyback.

FILING OF LETTER OF OFFER AND DECLARATION OF SOLVENCY WITH THE REGISTRAR:

Pursuant to Rule 17(2) of The Companies (Share Capital & Debentures) Rules, 2014, the unlisted company which has been authorized by a special resolution shall, before the buy-back of shares, file with the Registrar of Companies a Letter of Offer in Form No SH 8. It shall be dated and signed on behalf of the Board of directors of the company by not less than two directors of the company, one of whom shall be the managing director (if any).

Pursuant to Regulation 8 of SEBI (Buy Back of Securities) Regulations, 2018, in case of Buy-back through tender offer, the listed company shall:

Within two working days from the record date, file the following in electronic mode with the board: –

• a letter of offer
• certificate in the form specified by the board, issued by a merchant banker who is not associated with the company
• declaration of solvency as per Sec 68(6) of Companies Act

Pursuant to section 68 (6) of Companies Act, 2013 read with Rule 17(3) of The Companies (Share Capital & Debentures) Rules, 2014, a declaration of solvency has to be filed by the company to the Registrar and SEBI (if listed) along with the aforesaid letter of offer. As per aforesaid rule, declaration of solvency shall be filed in the Form No. SH.9 along with the fee and signed by at least two directors of the company, one of whom shall be the managing director, if any, and verified by an affidavit to the effect that the Board of Directors of the company has made an opinion that company is capable of meeting its total liabilities and that the company will not be rendered insolvent within a period of 1 year from the date of declaration adopted by the Board as specified in the said Form.

Author’s Comment:

• No declaration of solvency shall be filed with the Securities and Exchange Board by a company whose shares are not listed on any recognized stock exchange.
• the listed company shall not withdraw the offer to buy-back after the draft letter of offer is filed with the Board or public announcement of the offer to buy-back is made

DISPATCH OF LETTER OF OFFER TO SHAREHOLDERS:

Pursuant to Rule 17(4) of The Companies (Share Capital & Debentures) Rules, 2014, the letter of offer shall be dispatched to the shareholders of unlisted company immediately after filing the same with the Registrar of Companies but not later than 20 days from its filing with the Registrar of Companies.

Pursuant to Regulation 9 of SEBI (Buy Back of Securities) Regulations, 2018, in case of Buy-back through tender offer, the listed company shall dispatch the letter of offer along with the tender form to the securities holders who are eligible to participate in the buy-back offer not later than two working days from the record date and in case of receipt of request from any shareholder to receive a copy of letter of offer in physical form, the same shall be provided.

OFFER PERIOD:

Pursuant to Rule 17(5) of The Companies (Share Capital & Debentures) Rules, 2014, the offer for buy-back for an unlisted company shall remain open for a period of not less than fifteen days and not exceeding thirty days from the date of dispatch of the letter of offer. Provided that where all members of a company agree, the offer for buy-back may remain open for a period less than fifteen days.

Pursuant to Regulation 9 of SEBI (Buy Back of Securities) Regulations, 2018, in case of Buy-back through tender offer, the listed company shall make sure that:

• The date of the opening of the offer shall be not later than four working days from the record date.
• The offer for buy-back shall remain open for a period of five working days.

VERIFICATIONS OF THE OFFERS RECEIVED:

Pursuant to Rule 17(7) of the Companies (Share Capital & Debentures) Rules, 2014, an unlisted company shall complete the verifications of the offers received within fifteen days from the date of closure of the offer and the shares or other securities lodged shall be deemed to be accepted unless a communication of rejection is made within twenty-one days from the date of closure of the offer.

Pursuant to Regulation 10 of SEBI (Buy Back of Securities) Regulations, 2018, in case of Buy-back through tender offer, the listed company shall complete the verification of offers received within five working days of the closure of the offer.

PAYMENT TO SHAREHOLDERS/RETURN SHARE CERTIFICATE:

Within 7 days of time specified in aforesaid Rule 17(7), an unlisted company shall:

• make payment in cash to those shareholders or security holders whose securities have been accepted; or
• return the share certificates to the shareholders or security holders whose securities have not been accepted at all or the balance of securities in case of part acceptance.

Pursuant to Regulation 10 of SEBI (Buy Back of Securities) Regulations, 2018, in case of Buy-back through tender offer, the listed company shall make payment of consideration to those holders of securities whose offer has been accepted and return the remaining shares or other specified securities to the securities holders within five working days of the closure of the offer.

REGISTER OF BUY BACK OF SHARES:

Pursuant to section 68 (9) of Companies Act, 2013 read with Rule 17 of The Companies (Share Capital & Debentures) Rules, 2014, Where a company buys back its shares or other specified securities under this section, the company shall maintain a register of shares or other securities so bought-back the consideration paid for the shares or securities bought back, the date of cancellation of shares or securities, the date of extinguishing and physically destroying the shares or securities and such other particulars as may be prescribed in FORM NO. SH.10.

RETURN AND CERTIFICATION OF COMPLIANCE:

Pursuant to section 68 (10) of Companies Act, 2013 read with Rule 17 of The Companies (Share Capital & Debentures) Rules, 2014, the company shall file with the ROC & SEBI (in case of Listed Company) a return in form SH 11 signed by two directors out of which one shall be Managing director (if any) certifying the buy back of the securities has been made with compliance of the provisions of the Act and Rules made thereunder.

POST BUYBACK COMPLIANCES FOR LISTED COMPANIES:

Along with the aforesaid compliances (if applicable) and pursuant to SEBI (Buy Back of Securities) Regulations, 2018:

• The company shall issue a public advertisement in a national daily within two working days of expiry of buy-back period, inter-alia, disclosing:
• Number of shares or other specified securities bought.

• price at which the shares or other specified securities were bought.
• total amount invested in the buy-back; and
• the consequent changes in the capital structure and the shareholding pattern after and before the buy-back.
• details of security holders from whom the shares or other specified securities exceeding one percent of total shares or other specified securities bought back.

• The merchant banker shall ensure that a final report in the electronic mode is submitted to the Board within fifteen days from the date of expiry of buyback period.

TRANSFER OF CERTAIN SUMS TO CAPITAL REDEMPTION RESERVE ACCOUNT:

Pursuant to section 69 of Companies Act, 2013, the company shall transfer the sum equal to the nominal value of shares bought back to the Capital Redemption Reserve Account when the said shares are bought back out of Free Reserve or Security Premium Account. The capital redemption reserve account may be applied by the company, in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares.

Author’s Comment: We transfer the amount to CRR account because we don’t want the company to pay dividend out of it. This is because they have already broken the creditor’s trust by paying the shareholders before the creditors. In return, these funds are now blocked.

CIRCUMSTANCES IN WHICH BUYBACK IS PROHIBITED:

Pursuant to section 70(1) of Companies Act, 2013, no company shall directly or indirectly purchase its own shares or other specified securities: –

• Through any subsidiary company including its own subsidiary companies.
• Through any investment company or group of investment companies
• If a default, is made by the company, in the repayment of deposits or interest payment thereon, redemption of debentures or preference shares or payment of dividend to any shareholder, or repayment of any term loan or interest payable thereon to any financial institution or banking company.

However, buyback is not prohibited in aforesaid case if default is remedied, and a period of three years has lapsed after such default ceased to subsist.

Pursuant to section 70(2) of Companies Act, 2013, no company shall, directly or indirectly, purchase its own shares or other specified securities if company has not complied with the provisions of Section 92 (Annual Return), 123 (Declaration of Dividend), 127 (Punishment for failure to distribute dividend) AND 129 (Financial Statements).

Author’s Comment: By interpreting the word “AND”, it can be said that if a company is in default of sec 123 only or of sec 92,123 and 127 but has complied sec 129, then sec 70(2) shall NOT be attracted.

SECURITIES WHICH CAN’T BE BOUGHT BACK:

The Company shall not buyback the following securities:

• Lock-in securities: Any securities issued by a listed company to its promoters or group of employees, which subject to lock-in period are not available for buyback before expiry of lock-in period.
• Partly paid-up shares: A company can’t buy-back its partly paid-up shares, on which call money is in arrears.
• Non-transferrable securities: Those securities which are subject to lien or are pledged or restricted by a court can’t be bought-back by the company.

PENALTY:

Pursuant to section 68(11) of Companies Act, 2013, if a company makes any default in complying with the provisions of this section or any regulation made by the Securities and Exchange Board, the company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees and every officer of the company who is in default shall be punishable with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees.

CONCLUSION:

It can be concluded that Indian companies announce buyback in response to an over-capitalized company and their undervaluation position of their stocks in capital markets. Buyback can be termed as mixed bag. Buyback provides investors with exit opportunity when stocks are undervalued or sparsely traded. It can be used as an effective defence strategy to prevent hostile takeover. It offers an opportunity for the company to use its liquidity position to extinguish its shares today and issue them again in future. On the other hand, sometimes it may be used by the promoters to give a false signal about the company so as to increase the price of stocks so that promoters can sell their stocks, thus misleading shareholders. Therefore, every shareholder must reconsider all his views before purchasing the shares of companies involved in the process of buyback.

 INTRODUCTION:

 A limited liability partnership is a body corporate formed and incorporated under Limited Liability Partnership Act, 2008 and is a legal entity separate from that of its partners.

 LLP is a Partnership Firm established with Minimum 2 Partners (any individual or body corporate may be a partner in a limited liability partnership) who enters into a LLP Agreement. However, there is no upper limit on the maximum no. of Partners of a LLP and any change in the partners of a limited liability partnership shall not affect the existence, rights or liabilities of the limited liability partnership.

 Amongst Partners of LLP, every limited liability partnership shall have at least two designated partners who are individuals and at least one of them shall be a resident in India (As per latest amendment atleast one partner should have lived in India for not less than 120 days during the financial year is also entitled to become designated partner of the LLP).

• Designated Partners are responsible for the Compliance of the LLP.
• An individual shall not become a Designated Partner unless he gives his prior consent to act as such to the limited liability partnership in Form 9.
• The rights and duties of designated partners are governed by the LLP agreement.
• Every designated partner shall obtain a Designated Partners Identification Number

 The LLP has perpetual succession just like a company and the partners of an LLP have limited liability.

 KEY FEATURES OF LLPS:

1. Limited Liability: Partners’ liability is limited to their agreed contributions, safeguarding personal assets.
2. Separate Legal Entity: LLPs have distinct legal identities, enabling perpetual succession and ease of ownership transfer.
3. Flexible Management: LLPs offer management flexibility and streamlined decision-making processes.
4. Tax Benefits: LLPs are taxed like partnerships, with profits passing through to partners and no entity-level taxation.

 STEPS FOR INORPORATION:

1. SELECT PARTNERS AND DESIGNATED PARTNERS, OBTAIN THE DIGITAL SIGNATURE CERTIFICATE (DSC’s) AND DESIGNATED PARTNERS IDENTIFICATION NUMBER (DPIN’s): –
• LLPs require a minimum of two partners, with at least two designated as Designated Partners who are responsible for compliance of LLP.
• Partner/Designated partner of proposed LLP, whose signatures are to be affixed on the e-forms have to obtain class 2 and class 3 Digital Signature Certificate (DSC) from any authorized certifying agency.
• Individuals required to be appointed as Designated Partners need to have DPIN or DIN, and Application for the allotment of the DPIN can be made in Form Fillip.
– Provided that application for the allotment of DPIN shall not be made by more than 5 individuals in Form Fillip.

2. NAME RESERVATION: –
• Choose a unique LLP name and verify its availability through name search facility on MCA portal.
• Application for name reservation shall be made through RUN-LLP (Reserve Unique Name- Limited Liability Partnership) available on MCA V3 Portal.
• Re-submission of such application is allowed within Fifteen days for the rectification of defects.
• Such reserved name shall be available for a period of three months from the date of intimation by the Registrar.

3. DRAFT LLP AGREEMENT: –
• Prepare an LLP agreement detailing roles, responsibilities, profit-sharing, and other terms among partners. This agreement must be filed with the Registrar of Companies.
• Every limited liability partnership shall file information with regard to the limited liability partnership agreement in Form 3 with the Registrar within thirty days of the date of incorporation.

4. THE INCORPORATION DOCUMENT SHALL CLEARLY STATE THE:
• Name of the limited liability partnership;
• proposed business of the limited liability partnership;
• Registered Office Address of the limited liability partnership;
• Name and address of each person who is to become Partner/Designated Partner of the limited liability partnership on incorporation;

5. REGISTER WITH REGISTRAR OF COMPANIES: –
• The incorporation document shall be filed in Form FiLLiP with the Registrar having jurisdiction over the State in which the registered office of the limited liability partnership is to be situated.
• Application for Reservation of Name may be made through Form FiLLiP too, However, if the application for reservation of name is applied through RUN-LLP, which has been approved, then one may fill such reserved name as the proposed name of the LLP.
• Documents Required-
I. Proof of Office Address along with NOC, if applicable (Conveyance deed, Lease deed, Rent Agreement along with rent receipts)
II. Copy of Utility Bills (not older than 2 months)
III. Documents required in case of Individual Designated Partners/Individual Partners –
i. Income Tax PAN/ Passport Number details
ii. Copy of Identity Proof of Partners (Voters Identity card/ Passport /Driving License/Aadhar Card)
iii. Copy of Residential Proof of Partners (Bank Statement/ Electricity Bill/ Mobile Bill/ Utility Bill/ Regd. Notarized Rent Agreement)
iv. Passport size photograph
v. Valuation Certificate is Mandatory to be attached by user in case option “Other than cash ‘ is selected in field ‘Form of contribution’
vi. Subscribers’ sheet including consent.

 COMPLIANCE REQUIREMENTS:

1. Annual filings such as Annual Return (Form 11) and Statement of Accounts (Form 8) are mandatory.
2. Maintain proper accounting records and prepare financial statements in accordance with applicable standards.
3. Adhere to tax regulations, including GST and Income Tax filings.
4. Audit by CA only if contribution exceeds Rs. 25 Lakhs or Turnover exceed Rs. 40 Lakhs.
5. Certificate by Company Secretary only if contribution exceeds Rs. 50 Lakhs or Turnover exceeds Rs. 5 crores.

 CONCLUSION:

Incorporating an LLP provides a robust legal framework suitable for businesses seeking liability protection and operational flexibility. By following prescribed procedures and compliance requirements, LLPs can take advantage of a corporate structure while maintaining partnership values. This makes LLPs an attractive choice for SMEs, professional firms, and startups aiming to mitigate risks and foster sustainable growth.

For any further consultation or enquiry, write to us at jkg@jkgupta.com

Introduction:

Dematerialisation is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form and credited into the BO’s account with his DP.
Initially, dematerialisation of Securities limited to listed public companies. Later MCA’s notification on September 10, 2018, introduced Rule 9A of Companies (Prospectus and Allotment of Securities) Rules, 2014, extending dematerialization requirements to unlisted public companies.

Subsequently, MCA’s notification on October 27, 2023, introduced Rule 9B of Companies (Prospectus and Allotment of Securities) Rules, 2014, extending dematerialization requirements to private companies, excluding small companies.

Rule 9A provides that every unlisted public company shall:
(a) Issue the securities only in dematerialised form; and
(b) Facilitate dematerialisation of all its existing securities
in accordance with provisions of the Depositories Act, 1996 and regulations made there under
 Fresh issue/Buyback/Right: Company shall not make any offer for issue of any securities or buyback, or issue of bonus shares or rights offer, unless entire holding of securities of its promoters, directors, key managerial personnel has been demateriarised.

 Every securities holder of an such companies,
(a) who intends to transfer such securities on or after 2nd October 2018, shall get such securities dematerialised before the transfer; or
(b) who subscribes to any securities of an unlisted public company (whether by way of private placement or bonus shares or rights offer) on or after 2nd October 2018 shall ensure that all his existing securities are held in dematerialized form before such subscription.
 Exemption for dematerialisation to below mentioned companies: –
(a) a Nidhi
(b) a Government company or
(c) a wholly owned subsidiary.

Rule 9B provides that every private company, other than a small company, shall
(a) issue the securities only in dematerialised form; and
(b) facilitate dematerialisation of all its securities,
in accordance with the provisions of the Depositories Act, 1996 and regulations made thereunder.
 A private company, which as on last day of a financial year, ending on or after 31st March 2023, is not a small company as per audited financial statements for such financial year, shall, within eighteen months of closure of such financial year, comply with the provisions of this rule. For example, if the company’s financial year end on 31st March 2023, then, the company required to comply with these provisions before 30th September 2024 and if company’s financial year end on 31st December 2023, then, the company required to comply with these provisions before 30th June 2025.

 Fresh issue/Buyback/Right: Company shall not make any offer for issue of any securities or buyback, or issue of bonus shares or rights offer, after the date when it is required to comply with this rule, unless entire holding of securities of its promoters, directors, key managerial personnel has been dematerialised.

 Every holder of securities of the private company referred to in sub-rule (2),-
(a) who intends to transfer such securities on or after the date when the company is required to comply with this rule, shall get such securities dematerialised before the transfer; or
(b) who subscribes to any securities of the concerned private company whether by way of private placement or bonus shares or rights offer on or after the date when the company is required to comply with this rule shall ensure that all his securities are held in dematerialised form before such subscription.
 The provisions of this rule shall not apply to Government companies and small companies.

Important provisions regarding dematerialisation of Securities

 Every company governed by Rule 9A and 9B of Companies (Prospectus and Allotment of Securities) Rules, 2014 shall submit Form PAS-6 to the Registrar within sixty days from the conclusion of each half year duly certified by a company secretary in practice or chartered accountant in practice.

 Such company shall facilitate dematerialisation of all its existing securities by making necessary application to a depository as defined in Depositories Act, 1996 and shall secure International security Identification Number (ISIN) for each type of security and shall in-form all its existing security holders about such facility.

 Every company shall makes timely payment of fees to the depository and registrar to an issue and share transfer agent, maintains security deposit at all times, of not less than two years, fees with the depository and registrar to an issue and share transfer agent and it complies with the regulations or directions or guidelines or circulars, if any, issued by the SEBI or Depository from time to time with respect to dematerialisation of shares and matters incidental or related thereto.

 No company which has defaulted in above-mentioned provisions (related to fee, security deposit, regulations or directions or guidelines or circulars) shall make offer of any securities or buyback or issue any bonus or right shares till the payments to depositories or registrar to an issue and share transfer agent are made.

 The provisions of the Depositories Act 1996 the securities and Exchange Board of India (Depositories and participants) Regulations, 2018 and the securities and Exchange Board of India (Registrars to an Issue and share Transfer Agents) Regulations, 1993 shall apply mutatis mutandis to dematerialisation of securities.

 The company shall immediately bring to the notice of the depositories any difference observed in its issued capital and the capital held in dematerialised form.

 The grievances, if any, of security holders of unlisted public companies under this rule shall be filed before the Investor Education and protection Fund Authority.

Process for Dematerialisation of Securities

Once the company has facilitated dematerialisation of its existing securities, the investor/shareholder may convert its physical certificates into equivalent number of securities in electronic form after followed the process mentioned below:

Investor/shareholder has to fill in a DRF (Demat Request Form) which is available with the DP and submit the same along with physical certificates that are to be dematerialised. Separate DRF has to be filled for each ISIN. The complete process of dematerialisation is outlined below:

 Surrender certificates for dematerialisation to your DP.
 DP intimates to the Depository regarding the request through the system.
 DP submits the certificates to the registrar of the Issuer Company.
 Registrar confirms the dematerialisation request from depository.
 After dematerialising the certificates, Registrar updates accounts and informs depository regarding completion of dematerialisation.
 Depository updates its accounts and informs the DP.
 DP updates the demat account of the investor.

Depository: is an organisation which holds securities (like shares, debentures, bonds, government securities, mutual fund units etc.) of investors in electronic form at the request of the investors through a registered Depository Participant. It also provides services related to transactions in securities.

Depository Participant: is an agent of the depository through which it interfaces with the investor and provides depository services. Banking services can be availed through a branch whereas depository services can be availed through a DP.

ISIN (International Securities Identification Number) is a unique 12-digit alpha-numeric identification number allotted for a security (E.g.- INE383C01018). Equity-fully paid up, equity-partly paid up, equity with differential voting /dividend rights issued by the same issuer will have different ISINs.

Consequences and penalties for non-compliance (Section 450)

Monetary penalties on company and every officer in default:
On the company: INR 10,000 and in case of continuing contravention, with a further penalty of one thousand rupees for each day after the first during which the contravention continues, subject to maximum limit is INR 200,000
Every officer of the company who is in default – same as above. Maximum limit is INR 50,000

Contact us for any further consultation:

J. K. Gupta & Associates
email : cs@jkgupta.com

CSR- Corporate Social Responsibility

CSR is all about corporate giving back to Society.

 

SL No	Questions	Answers
1.	What is CSR	The Act introduces the culture of corporate social responsibility (CSR) in Indian corporate requiring companies to formulate a CSR policy and spend on social upliftment activities. CSR is all about corporate giving back to society
2.	Which Companies falls under purview of CSR	Every Company Satisfying any of the below mentioned criteria in the PREECEDING FINANCIAL YEAR is required to company the provisions of Section 135 along with its rules: – ·       company having net worth of rupees five hundred crore or more OR ·       Company having turnover of rupees one thousand crore or more OR ·       Company having net profit of rupees five crore or more.   Clarification: – it is to be noted here that the company satisfying any of the above criteria will fall under the purview of CSR.
3.	How Much CSR Expenditure Company needs to do.                           Areas of Spending	Where the company completed the period of 3 Financial Years: – 2% of Average Net Profits of the Company during the immediately preceding three Financial Years   Where the company has not completed the period of 3 Financial Years: 2% of average net profits during such immediately preceding financial years.   Clarifications: – PROFIT BEFORE TAX needs to be considered in Calculations (Adjusted as per section 198, if required)   The company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities
4.	When CSR Expenditure needs to be done and treatment of unspent CSR Amount	In relation to Other than Ongoing Projects:   – Till 31st March of the year in which spending needs to be done. If not, Transfer of Unspent CSR amount to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year i.e till 30th September of next FY.   In relation to Ongoing Projects (“Ongoing Project” means a multi-year project undertaken by a Company in fulfilment of its CSR obligation having timelines not exceeding three years excluding the financial year in which it was commenced, and shall include such project that was initially not approved as a multi-year project but whose duration has been extended beyond one year by the board based on reasonable justification): –   Spending till 31st march and if remains unspent then transfer of unspent CSR amount to Special Bank Account (Opened specifically for this purpose) within a period of thirty days from the end of the financial year and such amount shall be spent by the company in pursuance of its obligation towards the Corporate Social Responsibility Policy as per the policy and timeframe of its ongoing project approved by the Board with recommendation of CSR Committee. And no ongoing project could be extended for a period more than 3 years excluding the year of its commencement.    In crux funds allocated for ongoing project needs to be spent till completion of that ongoing project within the timeframe of 3 years set under rules and regulations of CSR.   **A company needs to open a separate “Unspent CSR Account” for each financial year but not for each ongoing project.
5.	What is the meaning of the term ‘administrative overheads? What is the maximum permissible limit for administrative overheads?	Administrative overheads are the expenses incurred by the company for ‘general management and administration’ of CSR functions. However, the expenses which are directly incurred for the designing, implementation, monitoring, and evaluation of a particular CSR project or programme  shall not be included in the administrative overheads   Example: – Salary and training for the employees working in the CSR division of a company, stationery cost, travelling expenses, etc. may be categorised as administrative overheads. However, salary of school teachers or other staff, etc. for education-related CSR projects shall be covered under education project cost.   The maximum permissible limit for administrative overheads is five per cent of the total CSR expenditure of the company for the financial year.   Clarification: – 5% of the actual Expenditure to be taken into account, not on the proposed expenditure.
6.	Modes of Spending CSR	·       Either by the companies itself ·       Through Section 8 Company/ Society/ Trust registered under section 12A and Approved 80G of the Income Tax Act , 1961 established by the Company ·       Through Section 8 Company/ Society/ Trust established by the Central Government or State Government ·       Through Implementing Agencies   It is to be noted that all entities mentioned above needs to register itself with Central Government by filing the form CSR-1 electronically with the Registrar
7.	Which Companies are required to Form CSR Committee       What is the composition of the CSR Committee?	Companies whose obligation of expenditure is above 50 lacs.         Companies who fall under the purview of Appointment of Independent Directors under section 149(4):- Three or more Directors out of which one shall be an Independent Director   Companies who does not fall under the purview of Appointment of Independent Directors under section 149(4):- Two or More Directors. No independent directors are required as mentioned in the proviso under section 135(1)   Foreign Company: – At least two persons out of which: (a) one shall be as specified under clause (d) of subsection (1) of section 380 of the Act, and (b) another shall be nominated by the foreign company
8.	Functions of CSR Committee	(a)     Formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company in areas or subject, specified in Schedule VII (b)    Recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and (c)     Monitor the Corporate Social Responsibility Policy of the company from time to time
9.	Disclosure Requirement by Board/Responsibilities of Board	·       Approve CSR policy after taking recommendation from CSR Committee ·       Board Report/Annual Report shall disclose the composition of the Corporate Social Responsibility Committee ·       Disclosure of Content of CSR policy in Board’s Report ·       Disclosure of Composition of the CSR Committee, CSR Policy and Projects approved by the Board on the website of the Company
10.	Penalty for Non-Compliance	The company is liable to a penalty of twice the amount required to be transferred by the company to the Fund specified in Schedule VII or the Unspent Corporate Social Responsibility Account, as the case may be, or one crore rupees, whichever is less.   On every Officer in Default:- one-tenth of the amount required to be transferred by the company to such Fund specified in Schedule VII, or the Unspent Corporate Social Responsibility Account, as the case may be, or two lakh rupees, whichever is less

 

 

Disclaimer: – This article has been prepared on the basis of information available till date. But professionals are advised to study the laws and compliance thoroughly before carrying out CSR Activities.

 

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