FDI in defence sector

FDI in defence sector has been allowed upto 49% of the equity of the investee, up from 26% as at present. Government of India vide Department of Industrial Policy & Promotion has issued Press Note no. 7/2014 dated 26th August, 2014 to this effect. This 49% is approval route from the Government.


Further this FDI limit of 49% will include all kinds of foreign investment i.e. FDI, FII, FPI, NRI, FVCI & QFIs.

Portfolio investment upto 24% is however allowed on automatic route.

The Government will consider FDI above 49% on a case by case basis.

There are other conditions such as

(a) the sector is subject to license and therefore licensing will be done by DIPP in liaison with Ministry of Defence;
(b) Applicant should be an Indian company owned and controlled by resident Indian citizens;
(c) Management of the company should be in Indian hands including the Managing Director/ CEO should be Indians;
(d) Chief Security Officer should be an Indian citizen;
(e) Full particulars of Directors/ CEO should be furnished alongwith the application;
(f) Preference will be given to OEMs or design establishments and companies having good track record in the past with the Armed Forces;
(g) There is no minimum capitalization requirement for the FDI;
(h) No purchase guarantee will be given by the Ministry of Defence;
(i) The company should also have maintenance and life cycle support facility for the product being manufactured in India along with the manufacturing facility;
(j) Import of equipment for pre-production activity including prototype will be permitted;
(k) Adequate safety and security procedures need to be put in place by the licensee;
(l) Standards and testing procedures for the equipment will have to be provided to the Government under appropriate confidentiality clause. The nominated quality assurance agency will do the inspection and audit of the Quality assurance procedures of the licensee. Self certification would be allowed on a case to case basis;
(m) Purchase preference and price preference might be given to the public sector enterprises in the sector;
(n) Arms and ammunition manufactured under license will be sold only to the Ministry of Defence or units under the ministry of home affairs. It cannot be sold in the private market. Export would be permitted subject to the guidelines.
(o) Non lethal weapons would be permitted to sold to persons other the MOD or MOHA subject to obtaining necessary permissions;
(p) The company would need to set up a verifiable system of removal of items from out of their factory. Violation of these provisions may lead to cancellation of the licence.
(q) All application to be made to the Foreign Investment Promotion Board (FIPB). Proposals upto 49% involving investment in excess of Rs.1200 crores (Rs.12,000 million) will be sent to the Cabinet Committee on Economic Affairs (CCEA) for clearance.
(r) For proposals beyond 49% approval will be sought from the Cabinet Committee on Security (CCS). Proposals beyond 49% and involving investment exceeding above limits will not require CCEA clearance if it has been cleared by the CCS.
(s) Government decision on the FDI will be communicated normally within a period of 10 weeks from the date of acknowledgement of the application.
(t) For proposals beyond 49% the application should be made by Indian company or foreign investor but the management need not be in Indian hands and it is not necessary to have Managing Director or CEO as Indian.

A copy of the press release can be found here



 

FDI in Railway sector

The Government of India has opened up railway infrastructure for domestic as well as foreign investors. Department of Industrial Policy & Promotion (DIPP) press note no. 8 dated 27th August, 2014 has been issued by the government opening up the rail infrastructure for investment by the private sector. The following activities has been opened up for FDI.

Construction, operation, maintenance of

(i) Suburban corridor projects through PPP;
(ii) High speed train projects;
(iii) Dedicated freight lines;
(iv) Rolling stock including train sets, and locomotives/ coaches manufacturing and maintenance facilities
(v) Railway electrification;
(vi) Signalling systems;
(vii) Freight terminals
(viii) Passenger terminals
(ix) Infrastructure in industrial park pertaining to railway line/ sidings including electrified railway lines and connectivities to main railway lines, and
(x) mass rapid transit systems.

100% FDI is allowed automatic basis but FDI beyond 49% of the equity of the investee company in sensitive areas will be put forth to the Cabinet Committee on Security for consideration on a case by case basis.

They have not allowed FDI or private investment in maintenance of railway stations or platforms and that is much needed because the existing infrastructure for maintenance and upkeep of the railway stations and platforms is not at all adequate, especially from the point of view of facilities to the passengers. I thought they should have allowed private investment in online and offline bookings as well because the IRCTC site as we know is totally unreliable.


A copy of the DIPP press note can be found here



 

Hyderabad Half Marathon - flyovers too many

Honestly when i reached the 18km mark at the recently held Airtel Hyderabad Half marathon on Sunday, 24th August, 2014 little did i expect to see a queue of runners all walking up the last flyover. That was indeed the last flyover on the route and although there was one very short incline thereafter also, but that was a major climb over for the day.

Hyderabad half marathon starts at Necklace road adjacent to the the Hussain Sagar Lake and finishes at Gadchibowli stadium. It is a point to point route unlike the out and back route that most half marathons prefer for some reason, this route has been made a point to point one. It has three flyovers i.e. immediately at the start with only 100 or 200 metres into the race and then one at 2 kms which is a long undulating one which seemingly never ends and once you get down from that 2nd flyover, then there are a series of undulations provided by the natural topography of Hyderabad. Most of the route passes through commercial areas of Hyderabad, which is why  you rarely get any cheering crowd from the local population. For all that matters, the local residents may be asleep blissfully unaware that a marathon event is taking place in their city.

The route is tough but the weather made it tougher that day because sun arose early itself at 6.30 a.m. and it was ahead of us i.e. hitting us in the face until 14 kms when we turned left and the sun mercifully was behind us. At that stage only i.e. at 14 kms on the left side road, there was some welcome breeze for a change. The saving grace was the railings put up by Hyderabad Metro Rail for construction purposes which was acting like a barricade and thereby providing some shade.

Otherwise the water and medical station were aplenty, well stocked, well distributed with lots of volunteers knowing their job and also acting as a cheering brigade. The finishing line was inside the stadium for it was a bit of a boost for many runners to be finishing in olympic style, but i would preferred an out and back route because one gets lots of cheering from the returning runners and also the finishing point being far too away from the centre of the city, trudging back to the city becomes a bore!!

Arrangements at the stadium was good, medals properly handed over, the refreshments handed over at the ground itself though it was a bit chaotic at the stadium with so many runners lying about in various stages of distress or agony.

But in leaving i thought having a natural undulating topography would have been a sufficient route, but adding that flyover at 18 kms mark was a bad mistake!! 

PPF investment limit expanded

The Government has vide its gazette notification dated 13th August, 2014 which is available here and the RBI has vide its notification dated 22nd August, 2014 which is available here enhanced the limits which can be invested in a Public Provident Fund Scheme from Rs.1.00 lakh per annum to Rs.1.50 lakhs per annum. This is effective from 13th August, 2014. 

One person company under Companies Act, 2013

One Person Company

 The Companies Act, 2013 introduces a new concept of “One person company”. This is the first time such a concept is being introduced in India. Basically it is giving legal corporate status of Proprietorship form of doing business. Salient features of this new concept are explained below:

 DEFINITION:

 Section 2(62) defines a “One Person Company” means a company which has only one person as a member.

 INCORPORATION:

 Section 3(1)(c ) – OPC can be formed only as a private company.

 In the subscription clause of the memorandum of association of an OPC, the member will state that he is subscribing to all the shares in the capital of the company.

 The Table F which is the model Articles of Association of a company limited by shares incorporates provisions of an OPC especially regarding membership, nominees, annual general meetings and board meetings.  The relevant clauses are clause 27, 48 and 76 respectively.

 Rule 3 of Companies (Incorporation) Rules provides that

 –      only a natural person who is an Indian citizen and resident in India shall be eligible to incorporate a OPC and to become a nominee for the sole member of the OPC

(so body corporates, foreigners cannot incorporate an OPC);

-      a person cannot incorporate more than one OPC or become a nominee in more than one OPC; (But he can be a member of one OPC and nominee of another OPC)

-      Where a member of an OPC becomes a member of another OPC by virtue of his nomination in that second OPC, he shall opt out of either one within a period of 180 days;

-      A minor cannot become a member or nominee of OPC or holds shares with beneficial interest;

-      An OPC cannot be incorporated or converted into a company under section 8 of the Act, which is the erstwhile section 25 companies or not for profit companies;

-      An OPC cannot carry out NBFC activities including investment in securities of any body corporate;

-      An OPC cannot convert itself voluntarily into any kind of company for a period of two years from the date of its incorporation unless within that period its paid up share capital increases to more than Rs.50 lakhs OR average annual turnover during the relevant period exceeds Rs.2 crores;

  

Section 12(3) second proviso states that the words “One Person Company” shall be mentioned in brackets below the name of such company wherever it is printed, affixed or engraved.  So it should be mentioned as follows:

Sachin Tendulkar

(One Person Company)

Not Sachin Tendulkar OPC or Sachin Tendulkar One Person Company

it should be mentioned below the name as required in the section.

 CONVERSION OF OPC INTO PRIVATE/ PUBLIC COMPANIES

 Rule 6 of the Companies (Incorporation) Rules, provides that where the paid-up share capital of an OPC exceeds Rs.50 lakhs or its average annual turnover during the relevant period exceeds Rs.2 crores then within 6 months from the date on which its paid up share capital increased as above or the last day of the relevant period for the turnover purposes, it shall convert itself into either a private company or a public company. “Relevant period” means a period of three immediately preceding consecutive financial years.

 An OPC can however voluntarily convert itself into a private company or a public company by increasing its members but only after 2 years from the date of its incorporation.

 CONVERSION OF PRIVATE COMPANY INTO OPC;

 An existing private company other than a section 8 company (i.e. not for profit company) having paid up share capital of Rs.50 lakhs or less OR average annual turnover during the relevant period of Rs.2 crores or less can convert itself into an OPC by passing a special resolution in the general meeting;

 Before passing such special resolution, the private company should obtain No Objection to conversion in writing from members and creditors;

 The private company can then start the procedure for conversion by submitting the relevant documents to the ROC.

 A public limited company cannot obviously convert itself into an OPC.

 NOMINATION:

 The memorandum of OPC  shall indicate the name of the other person who has given his consent in the prescribed form to be so named and who shall, in the event of the member becoming incapacitated due to death or incapacity to contract, become the member of the company. The written consent of such other person shall also be filed alongwith the incorporation documents while forming OPC;

 The memorandum of the company shall state the name of the person who in the event of the death of the subscriber shall become the member of the company.

 The member has powers at any time to change the name of the nominee by giving notice in the prescribed form. The new nominee should also give his consent to his name so appearing and any change in the nominee shall require amendment in the memorandum of association.

 Rule 4 of the Companies (Incorporation) Rules deals with nomination process:

 The nominee can withdraw his nomination by giving his consent to the member and also the OPC. In that case, the member shall nominate another person within 15 days of the notice of withdrawal after obtaining his written consent and send intimation of such nomination to the company. The OPC is required to file the notice of withdrawal of consent and fresh nomination within a period of 30 days from the notice of withdrawal.

 ANNUAL RETURNS AND FINANCIAL STATEMENTS:

 Section 92 provides that the annual return of an OPC should be signed by the company secretary or where there is no company secretary by a director.  This is a very queer kind of provisions because it fails to reason why an OPC should appoint a Company Secretary in its rolls since the provisions regarding mandatory appointment of KMP is way beyond the life of an OPC as per the Act. It should have been better if the requirement was that the annual return be signed by a Company Secretary in Practice.

 Section 134(1)  states that the financial statement(s) of the OPC shall be signed by one Director on behalf of the OPC before they are given to the Auditors for their Report thereon. Section 2(40) excludes the cash flow statement from the definition of financial statement in case of OPC.

 The Board report of the OPC need not contain the detailed disclosures as are enumerated in section 134(3) but should contain explanations or comments on every qualification, reservation or adverse remark made by the auditor in his audit report.

 The Third Proviso to section 137(1) gives leeway to an OPC to file its financial statement along with other documents that are required to be filed/ attached with it, with the Registrar within 180 days from the closure of the financial year. Here since there is no concept of annual general meeting for OPC, it is 180 days from the closure of the financial year. So basically OPCs have six months to file its annual financial statements with the Registrar.

 GENERAL MEETINGS AND BOARD MEETINGS

 Section 96 provides that an OPC is not required to hold the mandatory annual general meeting.

 Section 98 regarding power of tribunal to call meetings of members is not applicable to OPC.

 Sections 100 to 111 is also not applicable to OPCs.

 Section 100 – convening of extra-ordinary general meetings;

Section 101 – notice of general meeting

Section 102 – explanatory statement

Section 103 – quorum for general meetings

Section 104 – chairman of meetings

Section 105 – proxies

Section 106 – restriction on voting rights

Section 107 – voting by show of hands

Section 108 – voting through electronic means

Section 109 – demand for poll

Section 110 – postal ballot

Section 111 – circulation of members’ resolutions

 Since the provisions of general meetings are being excluded for an OPC, the question remains how the matters that are generally decided upon at the general meetings in case of normal companies are dealt with in OPCs. This question has been answered in section 122 (3) as follows:

 122 (3) For the purposes of section 114, any business which is required to be transacted at an annual general meeting or other general meeting of a company by means of an ordinary or special resolution, it shall be sufficient if, in case of One Person Company, the resolution is communicated by the member to the company and entered in the minutes-book required to be maintained under section 118 and signed and dated by the member and such date shall be deemed to be the date of the meeting for all the purposes under this Act.

 Even in case of Board meetings of OPCs, section 122(4) gives the answer:

 122(4) Notwithstanding anything in this Act, where there is only one director on the

Board of Director of a One Person Company, any business which is required to be transacted at the meeting of the Board of Directors of a company, it shall be sufficient if, in case of such One Person Company, the resolution by such director is entered in the minutes-book required to be maintained under section 118 and signed and dated by such director and such date shall be deemed to be the date of the meeting of the Board of Directors for all the purposes under this Act.

 What this means is that where there is more than one Director in the Board of Directors of the OPC, then they should convene and hold Board meetings as are done by normal companies and the procedure and practices to be followed by normal companies in such cases should be followed by the said OPC.

 Section 173(5) provides that OPCs shall be required to convene only one meeting in each half of a calendar year provided however that the gap between two Board meetings is not less than 90 days.  This is a peculiar provision which says that the gap between two Board meetings of an OPC should be not less than 90 days between each meeting. What will happen if an urgent Board meeting is required to be convened before 90 days from the conclusion of the first Board meeting. I thought the wording should have read as “not more than 90 days”

 Again this provision is not applicable where the Board of Director of OPC comprises of only one Director. In that case of course the  provisions of section 122(4) applies.

 Section 174 is regarding quorum of meetings of Board of Directors. This section will not apply to an OPC which has only one Director in its Board of Directors.

 DIRECTORS:

 Section 149(1)(a) provides that minimum one director should be appointed in an OPC. There is no restriction to appointing more than one director in an OPC, but maximum no. of directors that can be appointed is 15 as per section 149(1)(b).

 Section 152(1) provides that the subscriber to the memorandum shall be deemed to be the first director of the company until director(s) are duly appointed by the member in accordance with the provisions of the section.

 RELATED PARTY TRANSACTIONS:

 Section 193 is important regarding related party contracts by OPC. It says:

 193. (1) Where One Person Company limited by shares or by guarantee enters into a

contract with the sole member of the company who is also the director of the company, the company shall, unless the contract is in writing, ensure that the terms of the contract or offer are contained in a memorandum or are recorded in the minutes of the first meeting of the Board of Directors of the company held next after entering into contract:

 Provided that nothing in this sub-section shall apply to contracts entered into by the company in the ordinary course of its business.

 (2) The company shall inform the Registrar about every contract entered into by the company and recorded in the minutes of the meeting of its Board of Directors under sub-section (1) within a period of fifteen days of the date of approval by the Board of

So related party contracts with the sole member who is also the Director of the company are required to be entered in the memorandum or minutes and also communicated to the Registrar within 15 days of the Board meeting where the contract is approved.

Dormant company under the Companies Act, 2013

The Companies Act, 2013 introduces a concept of a dormant company within its ambit. It is the first time that such a concept is thought of, i.e. company which is not active. There is no definition of what constitutes a dormant company under the definition clause. A definition appears in section 455 of the Act and here also the concept is defined in a very roundabout manner.

Section 455 states

(1) Where a company is formed and registered under this Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar in such manner as may be prescribed for obtaining the status of a dormant company.

So dormant company can be a company formed for a future project or to hold an asset or intellectual property without there being any significant accounting transaction OR an inactive company. Now inactive company has been defined in section 455 as under:

(i) “inactive company” means a company which has not been carrying on any business or operation, or has not made any significant accounting transaction during the last two financial years, or has not filed financial statements and annual returns during the last two financial years;

So we get the definition of an inactive company from this definition which means that any company which has not been doing any business for the last two years OR (and here's the doosra!!) they have not filed any financial statements and annual returns for the last two years. So it means any active company doing regular business and regular accounting transactions, but has failed to file its mandatory annual documents, then it can also be construed to become a dormant company!!

Significant accounting transaction is also defined in order to clear out any ambiguity, it means

(ii) “significant accounting transaction” means any transaction other than—
(a) payment of fees by a company to the Registrar;
(b) payments made by it to fulfil the requirements of this Act or any other law;
(c) allotment of shares to fulfil the requirements of this Act; and
(d) payments for maintenance of its office and records.

So a company can apply for a "dormant company" to itself by making the necessary application in this behalf. And the Registrar shall maintain a Register of Dormant companies in its Records or Portal.

In case a company has not filed its annual mandatory documents for the last two years, then the Registrar can take it to the Dormant company status. It is not clear what happens when the company is taken to the dormant company status in such a scenario.

However a dormant company is still required to have minimum directors, hold minimum two Board meetings and file minimum one annual financial document with the Registrar.

A dormant company can apply to revert back to Active status company.

Now we come to the procedures for which we turn to the Companies (Miscellaneous) Rules, 2014

1) Application for obtaining status of dormant company is required to be made in form MSC-1 along with the fees. The fees ranges from Rs.2000/- for a company with a share capital upto Rs.25 lakhs to Rs.20,000/- for a company which has share capital more than Rs.10 crores;
2) Application for obtaining status of dormant company can be made only after obtaining special resolution approval of the shareholders or issuing notice to all the shareholders and obtaining consent of at least 3/4th of the shareholders in value terms;
3) Conditions : No inspection, inquiry, or investigation has been ordered or taken up against the company OR no prosecution has been initiated against the company and pending under any court
4) The company does not have any public deposits or interest thereon outstanding for payment
5) There is no outstanding loan, secured or unsecured. If there are unsecured loans then consent of the lender should be obtained and enclosed along with the form;
6) There should be no dispute or difference amongst the management or promoters of the company and a certificate to that effect is enclosed;
7) The company does not have any outstanding tax dues either to central or state government or local authorities;
8) The company has not defaulted in payment of its workmen's dues;
9) It is not a listed company;

The Registrar shall after considering the application issue a "Dormant company" status to the company and enter its name in the Register maintained for the purpose.

The company shall continue to have minimum number of directors (i.e. 3 in case of a public company and 2 in case of a private company);

Rotation of auditors shall not apply to a dormant company.

A dormant company shall file an annual "Return of Dormant Company" in form MSC-3 which indicates the financial position of the company and which shall be duly audited by a chartered accountant in practice. This should be filed within 30 days from the end of each financial year. i.e. on or before 30th April every year.

However, there is a proviso to Rule 7 of Companies (Miscellaneous) Rules, 2014 which says that a dormant company shall continue to file its return of allotment or change in directorships if such events occur. Really, if such events are going to occur in a dormant company, then should the company be called a dormant company or an active status company. It is not clear and there is ambiguity in this matter. Change in directorships could occur upon the death or incapacity of a director so that is understood in that context.

Section 173(5) stipulates that a dormant company should hold two Board meetings in a financial year i.e one each in each half of the financial year and the gap between two Board meetings should not be less than 90 days. This stipulation is not clear because once a company is a dormant company then where is the need to hold a Board meeting, except perhaps to approve the annual financial statements. I guess two Board meetings in a financial year has been stipulated as a matter of abundant caution.

The dormant company can revert to an active status company by making another application under section 455(5) of the Act in form MSC-4 along with the requisite fees. This application should be accompanied by the return in form MSC-3.

Proviso to Rule 8 of the Companies (Miscellaneous) Rules, 2014 says that a dormant company cannot remain as a dormant company for more than 5 consecutive financial years. If it remains so, then the Registrar shall commence the process of striking off the name of the company from the Records, i.e. the company will be removed. So maximum tenure for a dormant company is 5 consecutive financial years.

Rule 8(4) ibid provides that where the Registrar has a doubt that a dormant company has been indulging in business activities and in fact it is not dormant then he can take necessary action to revert its status to an active company.

So the entire concept of dormant company while it is not clearly defined in the Act or Rules, means that any company which is not doing business for two financial years and is not intending to do any business in the near future for upto 5 years can make an application to place its status as a dormant company under the Records. What this will ensure that the legal status of the company is intact and the name is available to the company for any future business programs. However as mentioned above, it cannot remain as a dormant company in perpetuity. It should make a decision to revert to an active status within 5 years or the Registrar will be empowered to strike off the name of the company from its records.

Many a times, promoters incorporate companies but either there is dispute between the promoters or a major project fails through or it is formed for holding an intellectual property title or an asset, then this concept of dormant company comes into use. All the company has to do is to file one annual financial document duly certified by a CA and keep the Directors in tact in the company.

Unfinished Potrait by Agatha Christhie

When you normally pick up an Agatha Christhie novel you usually expect a rural England mystery with liberal doses of suspense and crime in it. But this one writing under the pseudonym Mary Westmacott is a kind of semi autobiographical novel which almost mirrors her personal life. The writing is absolutely brilliant and it kind of touches a chord in your heart when you go through the travails that she endured. It is not exactly a kind of a sympathetic novel and it could have ended as a tear jerker but her powerful writing is what kept it alive. Pure genius.