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.

 

We provide Service for CSR Registration, Compliances and Advisory to Companies on CSR.

 

For any queries please contact: –
J. K. Gupta & Associates

Email Id: – cs@jkgupta.com 

The history of Corporate-Consulting:

We can often hear people using the term consulting, but let’s ask ourselves the question what Corporate Consulting really means and where it comes from?

The first management consulting firm was created in 1886 by Arthur Dehon Little, and initially specialized in technical research. However, Arthur D. Little refused to follow the general trends when the field he had created started to grow — according to his opinion — on much too homogeneous standards.

The first management consultancy to serve both industry and government clients was Booz Allen Hamilton, founded in 1914, while the first modern, pure management and strategy consulting company was McKinsey & Company. Marvin Bower, the Mckinsey’s CEO from 1950–1967, later developed the ‘professional’ status of consultants, focused on top MBA & Law graduates.

Later on, with the DuPont Company, the departmental structure was born. They reshaped their organization according to the different products: explosives, stains, and paints — opposed to the former structure based on functions: sales, production, R&D.

While from the 1940s to the 1960s, consulting firms contributed to the rise of multi departmental structures, from the mid-1960s, they started to sell strategy, rather than structure. By the end of the 1980s, consultants played a whole new role in firms: they would legitimize their strategy. The growth of strategic consulting led to the unification of practices or, how Paul DiMaggio and William Powell, called it, to an institutional isomorphism.

It is interesting to notice that until the mid-1960s, a firm would never recognize that it hired consultants, that would mean it was going through hard times. European firms were the first to publicly announce that they had hired American consulting companies, with an aim to give clear warranties of their legitimacy.

It is important to remember that consultants covered two principal functions:

• Bringing information
• Supporting legitimacy

Their role was to draw conclusions from observations and information they had and transpose these from one organization to another. This is where their advice to the companies which hired them came from.

What Corporate Consultants Bring to the table?

Expertise:

The main values of consultants include their knowledge, expert skills, and influence. Because consultants work with a variety of businesses, they may have a much broader and deeper knowledge of business trends, industry challenges, and new technologies and processes than internal employees.
In fact, according to Harvard Business School, consultants are fundamental in disseminating innovation and new knowledge within their industries.

Cost Savings:

When you hire a consultant, you pay only for the services that you need, when you need them. This can provide substantial savings over hiring a salaried employee with the same level of expertise to complete similar tasks.
Further, consultants in multiple areas—lean manufacturing, proactive funding, financial planning, etc.—can identify areas where you are currently spending more than you need to and help you cut costs.

Time Savings:

The experience of consultants means that they know best practices already. For example, a lean consultant can look at a client’s manufacturing process and very quickly identify inefficiencies. With a consultant, there is no need for business owners to reinvent the wheel or lose valuable time to something that can be completed by an expert contractor.

Objectivity:

Consultants provide a useful distance from business challenges; they are not emotionally invested in operations in the same way that business owners are and they can more easily identify and address challenges, whether the issue is implementing a new technology or completing a merger or acquisition.
The consultant’s objectivity can be especially important in family-run businesses, where dynamics could be emotional and core problems more difficult to discuss.

Customization:

Consultants do not offer a one-size-fits-all solution. Their value comes in learning about each client’s business and goals and tailoring advice and strategy consulting to the specific challenges that the business faces.
This customization means that a consultant’s solutions are much more effective than generic advisory services. For example, a legal consultant can select compliance requirement for which your business is clearly eligible and has to comply with.

Unsure about Hiring a Business / Corporate Consultant?

Despite the benefits of business consulting services, some business owners may be wary of engaging them. Researcher Lance Lindon has complained that consultants “would borrow our watch to tell us what time it is.” That is, some business owners may feel that consultants cannot tell them anything that they don’t already know. Other business owners and managers may reject consultants out of a discomfort with sharing the business’s problems with an outsider.

However, both concerns can be alleviated by choosing the right consultant for your business, one whose expertise will make a real difference to your firm’s growth.

Choosing the Right Consultant:

Select a consultant with a proven record of results. You might speak to other business owners and managers in your circle and see if you can get a recommendation.
You can also dig into the backgrounds of potential consultants through their websites and social media sites. Who have consultants worked for and what is their educational background? How long have they been in business? Such information will help ensure that your chosen consultant is a qualified expert who will provide concrete results.

As well, in choosing your consultant, remember that the best consultants meet both the technical and psychological needs of their clients.

The Journal of International Management Studies identifies the following additional key soft skills for consultants:

• Capacity to cognitively collect, synthesize, and analyze information about a business.<
• Empathy for the client’s situation.
• Discretion about the client’s operations.
• Adaptation to the client’s readiness for change and available resources.
• Ability to “read” the client’s environment and fit in.

Consultants should understand your motives for engaging them and should approach the consulting work as a partnership. Development of this partnership can be the key to a business owner saving time and money and reducing stress while positioning the company for longevity and success.

A Step towards the ‘MAKE IN INDIA’ campaign and to improve the ease of doing business in India: Again an attempt has been made from my side to share my experience regarding Incorporation of a Company under Companies Act, 2013 in the form of an Article. This Article contains the procedure for Incorporation of a Company under Companies Act, 2013
Incorporation is the legal process used to form a corporate entity or company. A corporation is a separate legal entity from its owners, with its own rights and obligations

INTRODUCTION TO INCORPORATION OF A COMPANY IN INDIA

• A Company comes into existence when a group of people comes together with a view of forming an association to exploit the business opportunities by bringing together human resources, financial resources and managerial resources.

• Company is a separate & distinct legal entity, which permits a group of people, as stakeholders, to apply to the government for an independent organization to be created, which can then focus on pursuing set objectives, and vested with legal rights such as to sue and be sued in its own name, own property, hire employees or loan and borrow money.

• As you move into the new house, first, there is a huge process of “getting used to” – which is anyway usual for any such shifting. But the biggest issue is – we get to realize several shortcomings that we did not realize until we shifted. This might include silly things such as an electric point that we missed, or a water outlet that is not working, and so on. In case of the new house, all these are our own follies, or those of the architect – so we go ahead and get them fixed. In case of the new Act – the fixing process is the long trail of amending the law, and in the meantime, you have the 6-months-in-jail staring at you all the time!

A company may be formed for any lawful purpose by:

1. Seven or more persons, where the company to be formed is to be a public company;
2. Two or more persons, where the company to be formed is to be a private company; or
3. One person, where the company to be formed is to be One Person Company, that is to say, a private company.

Minimum number of Directors required in a Company:

The minimum number of directors required to run a company-

• In the case of Public Company, the minimum number of directors shall be three.
• In the case of Private Company, the minimum number of directors shall be two.
• In the case of One Person Company, the minimum number of directors shall be one.
• And for other types of companies, the minimum number of directors shall be required as may be prescribed by law.

So, now there are 2 ways to incorporate a company

1. Incorporation of a company through a Normal process i.e. INC-7:

• INC-7 for Incorporation of company with more than seven subscribers
• DIR-12 For appointment of First  Director
• INC-22 for address of registered office of the Company

2. Incorporation of a company through a New process i.e. Single Window for incorporation Spice Form INC-32:

•  INC-32 (formerly INC-29)
•  INC-33 e-MOA
•  INC-34 e-AOA

Note: Only one name can be filed under Spice Form INC-32. However, if you need to file more than one name, then you may file INC 1 before SPICE form-32, 6 Names can be filed under INC- 1 form.

Ministry of Corporate Affairs (MCA) has recently introduced SPICE Form INC-32 which is a Simplified Performa for Incorporating Company Electronically through Companies (Incorporation) Fourth Amendment Rules, 2016. SPICE FORM 32 can help in the incorporation of a company with a single application for:

• Reservation of name
• Incorporation of a new company and/or
• Application for allotment of DIN.

(Note: Maximum three Directors are allowed for using this integrated form for filing     application of allotment of DIN while incorporating a company).

 Purpose/ Advantages of the eForm:

Form INC-32 can help in incorporating a company quickly in India by integrating many of the steps into a single process. It has been introduced to do away with the filing of various forms.

• No need to file a separate form for first director (DIR-12)
• No need to file a separate form for address of registered office (INC-22)
• No need to file a separate form for registration of PAN, TAN.

Key Features:

• DSC of Subscribers needed instead of physical sign.
• Date of signing MOA & AOA will be the date of affixing DSC.
• DSC of witness needed. If no DSC, no SPICE procedure.  

Type of Companies that can be incorporated using SPICe Form INC-32:

• Private Limited Company
• Public Limited Company
• One Person Company
• Section 8 Company
• Foreign company

(Note: For incorporation of producer companies, unregistered companies and companies being formed with more than 7 subscribers, new version of INC-7 shall be used).

This simplified & integrated process for incorporation of a company is done through:

• SPICe Form INC-32
• e- Memorandum of Association in Form No. INC-33 and
• E-Articles of Association in Form No. INC-34.

Declaration by Professional

The digital signature of a professional (Chartered Accountant/ Company Secretary/ Cost Accountant/ Advocate) is required to file Form INC-32. The professional must declare that all information presented in the form is correct and enter his/her membership number and certificate number.

Mandatory Attachments of spice form

• Memorandum of association
• Articles of Association
• Affidavit and declaration by first subscriber(s) and director(s)
• Proof of Office address (Conveyance/ Lease deed/Rent Agreement etc. along with rent receipts)
• Copy of the utility bills (not older than two months)

(The Integrated Form INC-29 has been replaced with SPICe Form INC-32 and as such the Form INC-29 have been completely removed from the MCA portal. The SPICe Form INC-32 is very similar to Form INC-29, which also helps with fast track incorporation of a company in India).

Conclusion:

SPICe Form INC-32 is surely an improvised version of e Form-29, while drafting the SPICe form, an accommodation was made to changes that benefited the stakeholders by reducing timelines and multiplicity of several forms in the process of Incorporation. SPICe will become the standard form and format for all incorporation related purposes.

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 the incorporation process using SPICE system].

We provide service for Registration, Incorporation and Formation of various companies ranging from Private, Public, Section 8 (Non-Profit Organization), and Wholly Owned Subsidiaries of Foreign Companies & LLP.

The laws relating to insolvency and bankruptcy in the earlier centuries were framed for penalizing the defaulting debtors. Over the Years there has been improvising change in the global regulatory framework towards corporate insolvency. The principal focus of modern insolvency legislation is not liquidation and elimination of insolvent entities but on the renovation of the financial and organizational structure of debtors experiencing financial distress so as to permit the rehabilitation and continuation of their business. If the rehabilitation is not possible it enables effective winding up of companies in time bound manner through single regulator i.e. “National Company Law Tribunal”.

What is Insolvency and Bankruptcy?

Insolvency a terminology used for a state, when an Individual or business entity is unable to meet its outstanding debts to the Creditors, Investors or Lenders. However, it may also arise when the Liabilities or Debts of a Company supersede the Assets or Income of the Company. Hence in simple terms:

“Insolvency is when an individual, corporation, or other organization cannot meet its financial obligations for paying debts as they are due.”

However, Bankruptcy is not exactly the same as Insolvency. Bankruptcy occurs when a court has determined insolvency, and given legal orders for it to be resolved. It is subject to be a legal scheme under which the Insolvent Debtor seeks relief.

Thereby, “Bankruptcy is the legal process whereby financially distressed firms, individuals, and occasionally governments resolve their debts”.

Evolution of Insolvency and Bankruptcy Code, 2016

The Insolvency and Bankruptcy Code, 2016 (IBC) is the law of India which seeks to consolidate the existing framework by creating a single law for Insolvency and Bankruptcy. The Insolvency and Bankruptcy Code, 2015 was introduced in Lok Sabha in December 2015. It was passed by Lok Sabha on 5^th May 2016. The Code received the assent of the President of India on 28^th May 2016.

The ecosystem of the Code is dependent on four pillars namely, the Insolvency and Bankruptcy Board of India (IBBI), Information Utilities (IUs), Insolvency Professional Agencies (IPAs) and Insolvency Professionals (IPs).

 

Objectives

• The Insolvency and Bankruptcy Code, 2016 (IBC) replaces a fragmented legal framework and a broken institutional set-up that has been delivering poor outcomes for years for creditors and distressed businesses. Almost all of these are now eligible to be initiated as new cases under the Insolvency and Bankruptcy Code (IBC).
• The Insolvency and Bankruptcy Code (IBC) offers a time-bound resolution process aimed at maximizing the value of a distressed business. This will benefit not just the creditor and debtor companies, but also the overall economy because capital and productive resources will get redeployed relatively quickly.
• The main objective of the new law is to promote entrepreneurship, availability of credit and balance the interests of all stakeholders by consolidating and amending the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms, proprietorship firms, personal guarantors and individuals in a time-bound manner and for maximization the value of assets of such persons.

 

Salient Features of The Code

1. Adjudicating authority– In relation to Insolvency Resolution and Liquidation for corporate persons including corporate debtors and personal guarantors, thereof shall be the National Company Law Tribunal having territorial jurisdiction over the place where the registered office of the corporate person is located. The Matters relating to Insolvency and Bankruptcy of individuals and partnership firms the “Adjudicating Authority” means the Debt Recovery Tribunal constituted under sub-section (1) of section 3 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993.
2. Corporate Debtor means a corporate person who owes a debt to any person
3. Financial and operational creditors- The code makes a distinction between creditors holding financial debt and creditors holding operational debt:
   • Financial Creditors: A person to whom Financial Debt is owed and to whom such debt is legally assigned or transferred. (Financial debt means debt extended against consideration for the time value of money, and includes: Term Loans, working capital loans, non-fund based limits such as bank guarantees, Bonds, notes, debentures, loan stock or any similar instrument, Lease or hire purchase agreements, receivables sold or discounted and any other transaction, having commercial effect of a borrowing or certain type of derivative transactions or liabilities in respect of guarantees or indemnities).
   • Operational Creditor: A person claiming in respect of the provision of goods or services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority, and any person to whom such debt has been legally assigned or transferred.
4. Resolution Professional (RP): For the purpose of Corporate Insolvency Resolution Process, RP means an insolvency professional appointed to conduct insolvency resolution process and includes an Interim Resolution Professional.

 

Qualifications and experience of Insolvency Professional

An individual shall be eligible for registration if he

(a) has passed the Limited Insolvency Examination within twelve months before the date of his application for enrolment with the insolvency professional agency;

(b) has completed a pre-registration educational course, as may be required by the Board, from an insolvency professional agency after his enrolment as a professional member; and

(c) has:-

(i) Successfully completed the National Insolvency Programme, as may be approved by the Board;

(ii) successfully completed the Graduate Insolvency Programme, as may be approved by the Board;

(iii) fifteen years’ of experience in management, after receiving a Bachelor’s degree from a university established or recognized by law; or

(iv) ten years of experience as one the following–

1. chartered accountant registered as a member of the Institute of Chartered Accountants of India,
2. company secretary registered as a member of the Institute of Company Secretaries of India,
3. cost accountant registered as a member of the Institute of Cost Accountants of India
4. advocate enrolled with the Bar Council.

However, as per Regulation 3 of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, a person shall be eligible to act as a Resolution Professional if:

• He is eligible to be appointed as an independent director on the board of the corporate debtor under section 149 of the Companies Act, 2013 (18 of 2013), where the corporate debtor is a company;
• Is not a related party of the corporate debtor; or
• is not an employee or proprietor or a partner:
  1. of a firm of auditors or company secretaries in practice or cost auditors of the corporate debtor; or
  2. of a legal or a consulting firm, that has or had any transaction with the corporate debtor amounting to ten percent or more of the gross turnover of such firm, in the last three financial years.

Who Can Initiate Corporate Insolvency Resolution Process?

As per Insolvency and Bankruptcy Code 2016, Corporate Insolvency Resolution process can be initiated by

(a) Financial Creditor;

(b) Operational Creditor; and

(c) Corporate Debtor, itself

 

The Corporate Insolvency Resolution Process

• A financial creditor, an operational creditor or the corporate debtor, may initiate corporate insolvency resolution process in case a default is committed by the corporate debtor.
• An application can be made before the National Company Law Tribunal (NCLT) for initiating the resolution process. Operational creditor needs to give demand notice of ten days to the corporate debtor before approaching the NCLT. If the corporate debtor fails to repay dues to the operational creditor or fails to show any existing dispute or arbitration, then the operational creditor can approach NCLT.
• Within fourteen days of filing such application, the Adjudicating Authority shall accept or reject the application. In case of acceptance of the application, the corporate insolvency process shall commence w.e.f. the date of admission of application.

Corporate insolvency process shall be completed within 180 days from the admission of application to initiate the process by NCLT.

• Within fourteen days from the date of commencement of the insolvency procedure, the Adjudicating Authority is obligated to appoint an Interim Resolution Professional (IRP) whose term shall not exceed 30 days from the date of appointment. IRP takes control of the debtor’s assets and company’s operations, collect financial information of the debtor from information utilities or from the Corporate Debtor.
• The Adjudicating Authority, after admission of the application declare a moratorium (a period under which the Corporate Debtor shall be prohibited the institution of any suits or continuation of pending suits or proceedings or transfer, encumber, alienate or dispose off any assets or any legal right or beneficial interest by the Corporate Debtor, or the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the Corporate Debtor.
• The Interim Resolution Professional shall make Public Announcement in Form A in One English Newspaper, One Regional Newspaper, on the website of the Insolvency and Bankruptcy Board of India and on the website of the Corporate Debtor within a period not later than three days from the date of his appointment and call for submission of claims by creditors by giving them Fourteen days to submit the proof of claims.
• The interim resolution professional shall within seven days of his appointment, appoint two registered valuers to determine the liquidation value of the corporate debtor.
• After receiving claims pursuant to the public announcement, Interim Resolution Professional or the Resolution Professional shall verify every claim within seven days from the last date of receipt of the Claim and constitute the Creditors Committee. All financial creditors shall be part of Creditors Committee and if any Financial Creditor is a related party of the Corporate Debtor, then such financial creditor will not have any right of representation, participation or voting. Operational creditors shall constitute a committee in the absence of any Financial Debt.
• With the formation of the Committee of Creditor, the Interim Resolution Professional shall convene First Meeting of Committee of Creditors within seven days of filing the report certifying constitution of Committee by giving Seven days’ notice to every participant of the Meeting.
• At the First Meeting of Committee of Creditors, the members of the Committee along with the Interim Resolution Professional as the Chairperson take all necessary decisions regarding the smooth working of the Corporate Insolvency Process.
• The Corporate Insolvency Resolution Process in complex cases or situations extend the time beyond 180 days of maximum up to 90 days as provided in the Code.
• Resolution Professional shall prepare Information Memorandum containing the details of the Corporate Debtor and shall submit the Information Memorandum in electronic form to each member of the committee and any Potential Resolution Applicant.
• The Resolution Professional shall also issue an invitation, including evaluation matrix, to the Prospective Resolution Applicants in accordance with clause (h) of sub-section (2) of section 25, to submit Resolution Plans at least thirty days before the last date of submission of resolution plans.
• The Resolution Plan as approved by the Committee of Creditors shall be submitted to the Adjudicating Authority at least fifteen days before the expiry of the maximum period for the completion of the Corporate Insolvency Resolution Process.
• The members of the Committee of Creditors shall also on approval of the majority decide on the restructuring process that could either be a revised repayment plan for the company, or liquidation of the assets of the company.

 

Insolvency Resolution and Bankruptcy for Individuals and Partnership Firms

The Provisions of the Insolvency and Bankruptcy Code, 2016 shall also apply to Partnership Firms, Proprietorship Firm, and Individuals. An Individual or Partnership Firm can also initiate the Insolvency Resolution Process where the amount of the default is not less than one thousand rupees.

Provided that the Central Government may, by notification, specify the minimum amount of default of higher value which shall not be more than one lakh rupees.

CONCLUSION

The Insolvency and Bankruptcy Code aims at repayment to Creditors without harming the Corporate Debtor, the Code serves to provide a secure and effective means to recover Debts and to remove or eradicate the Financial Distress of the Corporate Debtor. The Insolvency Professional serves to be an integral part of the Corporate Insolvency Resolution Process, the role of whom changes with the progress of the process. The IPs undertakes various roles such as an Interim Resolution Professional, resolution professional and eventually as a Liquidator depending on the stage of the Corporate Insolvency Resolution Process.

An offence is an Act, of omission or Default, whether committed wilfully or due to negligence, ultimately lead the Company or its officer, to Fine, penalties and/or imprisonment, as specified under the Act.

Compounding of offence is a tool, whereby a person/entity committing default, admitted that he / it has committed an offence and seeks Compounding, by filing an application to the compounding authority.

The compounding authority may compound the offence and direct the defaulting party to deposit compounding fee as decided by it, on case to case basis. Once the said compounding fee is paid, the defaults will no more be treated as offence.

The provisions pertaining to compounding of offences are set forth under Section 441 of Companies Act, 2013.

Section 441 of the Act provides for compounding of following offences:

Offence punishable with fine only, or
Offence punishable with fine or imprisonment or both.

The following offences cannot be compounded under the Act:

Offence punishable with imprisonment only.
Offence punishable with both imprisonment and fine.

Compounding authorities under the Companies Act, 2013:

Under the Act, the compounding authority shall be either “Regional Director” or “National Company Law Tribunal”. Classification in between the Compounding Authority shall be based upon the Quantum of Fine involved in an offence.

An offence shall be compounded by Regional Director, where the maximum amount of fine which may be imposed for such offence does not exceed INR 25 Lacs.
All offences where the maximum amount of fine which may be imposed for such offence exceed INR 25 Lacs, shall be compounded by National Company Law Tribunal.

Procedure for compounding of offences:

An application for compounding of offences has to made in Form GNL-1 to Registrar of Companies under jurisdiction, the Company is registered.
Registrar shall forward the same, together with his comments thereon, to the Regional Director or NCLT depending upon the amount of fine which be imposed.
The Tribunal or the Regional Director or any officer authorised by the Central Government, as the case may be, while dealing with a proposal for the compounding of an offence for a default in compliance with any provision of this Act which requires a company or its officer to file or register with, or deliver or send to, the Registrar any return, account or other document, may direct, by an order, if it or he thinks fit to do so, any officer or other employee of the company to file or register with, or on payment of the fee, and the additional fee, required to be paid under section 403, such return, account or other document within such time as may be specified in the order.

(Any officer or other employee of the company who fails to comply with any order made by the Tribunal or the Regional Director or any officer authorised by the Central Government shall be punishable with imprisonment for a term which may extend to six months, or with fine not exceeding one lakh rupees, or with both)

The compounded amount shall not exceed the maximum amount of fine.

Barriers to Compounding of offences under Companies Act, 2013

Any offence covered under this Section 441 by any company or its officer shall not be compounded if the investigation against such company has been initiated or is pending under this Act.
No offence committed by a company or its officer within a period of three years from the date on which a similar offence committed by it or him was compounded under this section is again compoundable.
Offences punishable with imprisonment only or with both imprisonment and fine are not allowed to be compounded under this Act.

Benefits of compounding of offences under Companies Act, 2013

Avoiding losing the Dignity and Goodwill of the Company and its office.
Last resort to correct any unintentional Default and Non Compliance
Avoiding heavy Fines and Penalty.
Restarting the Business Activities of the Company.

J. K. Gupta & Associates, (Company Secretaries), having experience of more than 25 years, has till date successfully completed many compounding assignment of its clients. For Assignments of Compounding of offences under companies Act, 2013, Kindly Contact us.