issue of shares at a discount

Issue of shares at a discount is covered under section 53 of the companies act, 2013. A company cannot issue shares at a discount and any such issue shall be void. Subsequently vide the 2017 amendment, issue of shares at a discount was allowed for limited provisions of converting debt into shares pursuant to a statutory resolution plan or debt restructuring scheme in accordance with the guidelines of RBI. So basically the debt restricting scheme should be under the aegis of RBI. The statutory resolution plan can be under IBC also.

Now vide the 2018 Ordinance, contravention of this section has been made more stringent. Now where any company violates this section, the company and every officer who is in default shall be liable to a penalty which shall be equal to the amount raised through issue of shares at a discount of Rs.5 lakhs, whichever is LESS, AND the company shall also be liable to refund all the monies received with interest at the rate of 12% per annum to all the persons to whom the shares were issued.

The earlier provision was penalty of not less than Rs.1 lakh extending upto Rs.5 lakhs for the company and jail term for every officer which may extend to 6 months or with fine of not less than Rs.1 lakh but which could go upto Rs.5 lakhs or with both.

Now to end the confusion, the jail term has been removed for the officer in default but the penal fines has been increased considerably. 

conversion of public company into private company.

MCA has vide an amendment through the Companies Act (Ordinance), 2018 specified that conversion of a public company into a private company will require the approval of the central government,  which means basically it will be the RD office which will manage that. Hitherto it was with the Tribunal.

This is part of the ease of doing business initiative of the government, wherein they first make a provision as inordinately draconian and then keep on relieving the pressure bit by bit to make it seem as a great initiative. This should never have gone to the tribunal considering the kind of pressure and load that our NCLT have ever since its inception, it has been loaded with all and sundry kinds of judicial work.

All pending applications, will, however be handled by the Tribunal only.

regd office

MCA has introduced a new sub-section (9) in section 12 of the companies act, 2013 wherein it gives powers to the Registrar to visit any registered office of a company where it believes that there is no business going on in that premises, and in case there is default, i.e. he finds that there is actually no business or operations going on in that premises, he can take action for striking off the name of the company from the records of MCA.

This is a very draconian provision in the sense that it gives vast powers to a government official to strike off the name of the company where he believes that the company is not doing any business or operations in its registered office.

Therefore, compliance for companies to show that business or operations are taking place in their registered offices - name plate of the company on the outside of the regd office, copy of certificate of incorporation and other statutory licenses to be displayed prominently on the walls of the R/O, keeping books of accounts, statutory registers, original documents, licences, share certificates, common seal, invoice books, bank documents (passbook, cheque book etc.) etc. to be kept at the R/O. All official documents like letter heads should carry the name, CIN, registered office address, GST no., telephone no., e-mail id, website (if any).  

Payment Banks and Small Finance Banks

RBI has clarified that Payment Banks and Small Finance Banks are now allowed to access the call money market both as borrowers and lenders. This is allowed even while the process to get themselves included in the second schedule of the RBI Act, 1934. Second schedule are basically scheduled banks and includes commercials banks and co-operative banks.

The payment banks and small finance banks have to adhere to the prudential limits and other guidelines on call money market. They have to follow the master directions on money market instruments which can be found here.   Call money market includes the call/ notice/ term money market.

The RBI notification can be accessed here

Northern Wilderness

Northern Wilderness by Ray Mears is a fascinating adventure book going into the northern desolate part of Canada and its first explorers and adventurers. It starts with the description of the boreal forest and goes onto the fur trade which starts off and which in turn led to the formation of the Hudson Bay Company but quickly goes to the adventurers trying to locate the Northwest Passage, the strait which connects the Atlantic to the Pacific in the northern part of Canada. It quickly talks of the adventures of Samuel Hearne, Alexander Mackenzie (after whom the Mackenzie River is named), David Thompson, Captain James Cook, George Vancouver, John Jewitt and John Rae. Fascinating to read the contribution of these great men to the world. They were able to proceed further and survive the harsh winter because they adjusted to the life in the tundra just like the local people did. Goodreads 4/5

Eligibility criteria for sponsors - ARCs

RBI has released guidelines on the fit and proper criteria for the sponsors of the asset reconstruction companies.

Determinants of fit and proper status of sponsors of ARCs

In determining whether the sponsor is fit and proper, the Bank shall take into account all relevant factors, as appropriate, including, but not limited to, the following:

(i) The sponsor’s integrity, reputation, track record and compliance with applicable laws and regulations;

(ii) The sponsor’s track record and reputation for operating business in a manner that is consistent with the standards of good corporate governance, integrity, in addition to the similar assessment of individuals and other entities associated with the sponsor;

(iii) The business record and experience of the sponsor;

(iv) Sources and stability of funds for acquisition and the ability to access financial markets;

(v) Shareholding agreements and their impact on control and management of the ARC.

Continuous monitoring arrangements for due diligence in case of existing sponsors

(i) For the purpose of ensuring that all its sponsors are fit and proper, every ARC shall

(a) obtain within one month of the close of financial year a declaration from all its sponsors in Form I as specified in the schedule to these Directions;

(b) furnish a certificate in Form III, by the end of May every year, to the Reserve Bank on the changes in the status of the sponsor.

(ii) Every ARC shall examine any information on the sponsors which may come to its notice that may render such persons not fit and proper to hold such shares and shall immediately furnish a report on the same to the Bank.

Bank notification can be found here

Badhai Ho

Watched Badhai Ho with the wifey on Sunday. watching a movie in a cinema hall after a long time, that too a Hindi movie. The movie is quite good, a dry humour on the topic of late pregnancy when the children are already adults and working or studying and could become parents themselves. Small town north India, local dialects, decent acting by people, at least no over acting, decent dialogues and not many sentimental scenes which are the bane of Hindi movies. So the content is good, decent pace for the movie, not very preachy kind of movie and best of all super acting by veterans Neena Gupta and Surekha Sikri, both of them coming to the celluloid world after a long hiatus. Good to see them back. 

12.03 kms in Aarey Forest

A 12.03 kms run in Aarey Forest on 28th October (posting late). Going to Aarey after a long time, so it was quite tough, but weather was very pleasant. No plan on any distances, but felt good so kept on running all the flat surfaces in Aarey (did not want to do too many hills). Aarey Forest is beautiful, a heaven in a mega city. Pity that the Chief Minister wants to destroy this beautiful forest for his stupid metro car shed project.

change in financial year

The Companies Act, 2013 when it was introduced had mandated that all companies will have a uniform accounting year i.e. April to March each year. But the Act had given exemptions to those companies who were holding or subsidiary or associate company of a company incorporated outside India and which were required to have a different financial year than from April to March, then such companies can make an application to the Tribunal for change in their financial year accordingly.

Many companies fell under that ambit and one of my client companies also was a subsidiary of a foreign holding company. Accordingly the application was made to the CLB (when it existed) and even the CLB officials were unaware at that time that such matters are required to come to them. The application and hearing was a farce and the request was granted automatically and mechanically. So much for ease of doing business. The companies act, 2013 when it got notified was replete with such draconian provisions.

Now vide the Companies Act, ordinance, 2018 that application process had been taken away and given to the Regional Director. Of course with the CLB having been extinguished, all such applications would have been going to the NCLT, which is a sheer waste of their time and resources.

In my view, it should be no approval and all that stuff. Company should just inform that it is changing its financial year because of the reasons specified. So much for ease of doing business. 

certificate of commencement of business

MCA has vide its Companies (Amendment) Ordinance 2018 inserted a new section 10A after the existing section 10 wherein companies incorporated after this Ordinance has come into force i.e. from 2nd November, 2018 are required to file a certificate of commencement of business before it commences business or exercises borrowing powers. Which means that unless this certificate of commencement of business is filed with the ROC, it cannot start issuing invoices and receiving moneys.

The declaration has to be filed by a Director of the company within a period of 180 days from the date of incorporation to the effect that the subscribers to the memorandum have paid in their subscription monies. The declaration will also include a verification about the registered office of the company. I guess the form of verification of the registered office i.e. form INC-22 will be modified to that extent.

Which means that the company can open a bank account and the bank account can be used only for accepting the subscription monies from the subscribers to the memorandum, but no other receipts can be made into that account unless the certificate of commencement of business has been filed. This is an onerous requirement which ensures that only genuine people start companies with an intention of doing business. We have seen many shell companies being incorporated with no business in it for years and years.

This requirement of certificate of commencement of business was there when the Companies Act, 2013 was promulgated in 2013 but subsequently removed by the MCA under the banner of "ease of doing business". Wonder what prompted the Ministry to bring this draconian requirement back into the statute books.

The penalty for non compliance with this section is huge. Rs.50,000 for the company and Rs.1000 per day for every officer in default. Max amount of penalty Rs.100,000/-

Where no declaration has been filed the ROC has now powers to strike off the name of the company from its records.