Tuesday 19 December 2017

To strengthen the Corporate Governance standards, initiate strict action against defaulting companies and help improve the ease of doing business in the country The Companies (Amendment) Bill 2017 was passed by the Lok Sabha on 27th July 2017.

Rajya Sabha gave its nod to the Companies (Amendment) Bill that seeks to bring major amendments in the Companies Act, 2013 on 19th December 2017.

Now, only the President’s assent is pending to give it the statute of ‘Companies (Amendment) Act, 2017’.

The major amendments proposed include simplification of the private placement process, providing for maintenance of register of significant beneficial owners and filing of returns in this regard to the ROC, removal of requirement for annual ratification of appointment or continuance of auditor, streamlining of provisions related to loan to directors etc. The amendments proposed in the Bill are expected to simplify disclosure and compliance requirements for companies.



Friday 24 November 2017

BENEFICIAL OWNERSHIP - Proposed Amendment & Implication

Background
The Government of India in order to strengthen the transparency norms has proposed an altogether new section 90 in the Companies (Amendment) Bill, 2017 which proposes to identify significant beneficial owner(s) of a company as any person or trust. The ministry, addressing the recommendation as given by financial action task force (FATF), has proposed a new amended section 90 which aims to identify the natural personcontrolling a corporate entity, directly or indirectly, in order to curb various money laundering, corrupt illegal practices and other tax evasion activities.
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The concept of beneficial interest usually comes into picture when the certain interest or right accrues to the registered owner/legal owner but may be vested in some other party i.e. beneficial owner.

Generally, registered owner and beneficial owner are one and the same person, however, in certain cases they may be different i.e. there may be a case where the person whose name is entered in the register of members of a particular Company is different and the person who actually enjoys the right of ownership is different.  This article covers the implications of the proposed section and the questions which still remain unanswered.

The  definition of beneficial interest has been proposed to be included vide amended section 89which will widen the scope of beneficial interest and includes right & entitlement of a person alone or together with any other person to exercise rights attached to such share or receive or participate in any dividend or distribution in respect of such share.

The term Significant beneficial ownership has been defined under section 90 where every individual, who acting alone or together, or through one or more persons or trust, including a trust and persons resident outside India, holds beneficial interests, of not less than twenty-five per cent or such other percentage as may be prescribed, in shares of a company or the right to exercise, or the actual exercising of significant influence or control.

 Implications of the Proposed Amendment
Prior to the proposed amendment section 90 prescribed provisions regarding investigation of beneficial ownership of shares in certain cases.However, the proposed amendment will widen the scope of this new substituted section and will cast various responsibilities on the company as well as significant beneficial owner ( Individuals).

What implications will it have on significant beneficial owners?
Every individual who together with other person or trust exercises or holds not less than 25 % of shareholding of such company, either individually or jointly, will now have to give declaration about the nature of interest in prescribed manner to the concerned company.
ü Further if the beneficial owner does not disclose the information as required by company, the tribunal may restrict the rights attached with the shares.

What implications will it have on the companies?
ü The companies are now mandated to maintain register of significant beneficial owners.
ü Each company would be required to ask details of individual, holding or exercising rights over 25% of shareholding in the company from its corporate / trust /body corporate members.
The requirement on the part of companies to file a return of significant beneficial owners and changes therein with the Registrar of Companies.
ü Further the Companies have now been provided wide powers to seek information from any person where the company has reasonable cause to believe such person to be a beneficial owner of the company.
ü Companies also now have the power to approach the Tribunal in case of non-receipt or inadequate response from the members and non-members;
ü If a company, required to maintain register and file the return fails to do so or denies inspection as provided therein, the company and every officer of the company who is in default shall be punishable with a fine.

 Conclusion
The proposed section 90 although will certainly bring the transparency and reveal the true identity of the real owner under the complex structures, however certain questions still remain unanswered, which is expected to be resolved through rules as may be prescribed by government after notification of this amendment:
(i)    The proposed amendment has nowhere defined any criteria with respect to disclosure of change in the significant beneficial ownership, so the question which arises is as under

What percentage of change in significant beneficial ownership is to be disclosed or whether even a minor change say less then 1 % in significant beneficial ownership is to be reported?

(iii) Also no provision or penalties have been specified, if companies purposely do not cause to conduct any enquiry with respect to significant beneficial ownership.
What are implications which the company will have to face if it does not conduct an enquiry where it has reasonable cause to believe a person to be significant beneficial owner?

(iv) Also, nothing in the section has been specified about the transition period i.e. if the companies will be provided time to understand the intricacies of such amendment:
Whether any transition period will be provided to the companies in order to comply with the requirements of this section or whether such requirement needs to be complied with immediate effect?

(v)   Further it is not clear from the proposed amendment that :
Where more than one individual jointly holding significant beneficial interest in a company through another company , in such case whether each individual has to give disclosure along with other individuals or only that individual holding majority shares will be required to disclose ? 
 For instance, if there is a company XYZ ltd. which has three shareholders A, B and DEF Private limited, where DEF Private ltd. holds 26% of total paid up share capital of XYZ ltd. and Mr. E and F holds 40% and 60% respectively in DEF Private Ltd.  

Now question which arises here is that in this case, whether Mr. E and F both have to disclose to the company about its beneficial interest or only Mr. F would be required to disclose being a majority shareholder of DEF Private Limited ?

It is expected that rules to be prescribed by government of India will clarify the position and resolve most of pending issues. But for sure, this provision will impact each company operating in India with complex shareholding structure, where it has been almost impossible for government to know the real natural persons controlling the company.




Tuesday 1 August 2017

Partner with “LexisNexis for Practical Guidance on Indian Company Law"

We are highly pleased to inform you about our partnership with “LexisNexis” ( an international publication house). We are one of the Indian Company Law partner of “Lexis Nexis” to their product “Lexis® Practical Guidance” which is an online workflow based practical solutions.

We are supporting in drafting/updation or modifications of various chapters of the Companies Act, 2013 and Insolvency and Bankruptcy Code, 2016 such as Setting up of Company, Alterations in Charter Documents, Raising of funds, Holding Meetings, appointment of board members/ managerial personals, Corporate Resolution & liquidation etc as applicable to a listed or an unlisted company in India.
Practical Guidance on Indian Company Law is a unique combination of content and technology that is designed to perfectly complement your day to day work and which will be accessed anytime and anywhere and which in turn save significant time and effort of professionals.

Our contribution as a partner with them has added an immeasurable paragon of knowledge and precious experience to our firm.We would like to extend our heartfelt gratitude for continuous encouragement, valuable advices put forth by you time to time in order to achieve such milestones.




Monday 29 May 2017

CROSS BOARDER MERGER- AN ADVANCE MOVE FOR INDIAN COMPANY


By maintaining its persistence efforts in making India as an active participant in development of world economy, the Central Government (Ministry of Corporate Affairs), has notified section 234 of the Companies Act, 2013 with effect from April 13, 2017 which states provisions for cross boarder merger. In order to supplement the said section, the MCA has also notified corresponding amendments to the Companies (Compromises, Arrangements and Amalgamations) Rules 2016, by inserting a new Rule 25A to be effective on and from 13 April 2017. Through this article we try to provide you a quick peep into the newly notified section 234.

Cross Boarder Merger- newly permitted arena for Indian Company:

With effect of this notification, an inbound merger as well as outbound merger will be possible, while the former covers a merger of foreign company into an Indian company, where an Indian company turned out to be the continuing company and the later covers the merger of an Indian company into foreign company, where the foreign company will be the continuing company.

The permitted jurisdiction for cross border merger:
The notified section 234 has permitted certain jurisdictions where the Indian company may merger with the surviving foreign company, these include:

    •  whose securities market regulator is a signatory to the International Organisation of Securities Commission's Multilateral Memorandum of Understanding (MoU) (Appendix A signatories) or a signatory to the bilateral MoU with Securities and Exchange Board of India (SEBI); or
o  Whose central bank is a member of the Bank for International Settlements; and a jurisdiction which is not identified in the public statement of Financial Action Task Force (FATF) as:
                                                              i.      a jurisdiction having strategic 'Anti-Money Laundering or Combating the Financing of Terrorism' deficiencies to which counter measures apply; or
                                                            ii.      a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the FATF to address the deficiencies.

The prominent provisions of section 234:

The provisions as provided under Sections 230 to 232 of 2013 Act (which are applicable in case of a merger of Indian companies) and the corresponding provisions under the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 to be complied with in the case of cross border mergers.

Key Compliance checks for cross border merger:
a.      the transferee company should ensure that its valuation is:
  • conducted by such valuers who are members of recognised professional body in their country, and
  • in accordance with internationally accepted principles on accounting and valuation.
b.      The valuation declaration has to be filed along the application to Reserve Bank India for prior approval.
c.       Prior approval of Reserve Bank of India, before filing an application with the National Company Law Tribunal under section 230-232 of the Act.
d.      The consideration for merger to the shareholders of the Indian merging company may be paid in cash or depository receipts or partly in cash and partly in depository receipts.
e.       Other compliances pertaining to conducting meeting of shareholders/creditors, notification to Income-tax authorities along with other sector specific regulators etc.

In Conclusion:

The Central Government has positively addressed the need of letting the Indian company to merge or amalgamate with the foreign company for exploring new avenues of business, however, there are still some points which need a consideration in the notified section and rules thereunder, for instance there is a requirement of introduction of necessary changes in the Income Tax Act, Foreign Exchange Management Act and provisions relating to Indian Depository Receipt to enable merger of an Indian Company with foreign entity. Secondly, the tax implication on capital gains arising out of outbound merger need to be introduced in Income tax law. Lastly, the notified section speak much about cross border merger, however, there is no provision for effectuating the demerger of such foreign company. Nonetheless, the ministry may introduce the appropriate changes after encounter them in eventual face of implementation of notified section.


The link to the notification effecting section 234 of the Companies Act, 2013-

The link to the relevant rule 25A in the Companies (Compromises, Arrangements and Amalgamations) Rules 2016- http://www.mca.gov.in/Ministry/pdf/CompaniesCompromises_14042017.pdf