Impact Analysis of Second Amendment to MGT Rules

Rule 9 deals with ‘Declaration in respect of beneficial interest in any shares’.

Change: After Rule 9 (3) the following shall be inserted:

“Provided that nothing contained in this rule shall apply in relation to a trust which is created, to set up a Mutual Fund or Venture Capital Fund or such other fund as may be approved by the Securities and Exchange Board of India”

Change: The words “either value or volume of the shares” shall be omitted

Explanation.- For the purpose of this sub-rule, the expression “change” means increase or decrease by two percent or more in the shareholding of each of the promoters and each of the top ten shareholders of the company.

Change: Explanation Omitted

Sure enough this provision has already created a lot of confusion with its language. The Act provided that only a change in the number of shares (i.e. volume) of the promoters and top 10 shareholders were required to be filed with the RoC within 15 days of change. Confusion was whether even a one share change was also to be reported?

The Rules clarified the confusion by prescribing a change limit of 2% for reporting. However the Rule also created its own version of law and provided that every change i.e. increase or decrease of 2% shareholding ‘either in value or volume’ was to be reported. Thus the Rules additionally laid down the requirement of reporting a 2% change in the value of shareholding as well.

This amendment seeks to restore the provision of the Act and companies would now be required to disclose changes w.r.t. only the number of shares.The omission of the Explanation does not make much of a difference as the same can be derived from the Rule itself.

Another point worth noting here is that while they were onto amending the said Rule, the MCA could have as well clarified and prescribed a mode for ascertainment of the change of 2% i.e. whether a series of events bringing about the ‘change’ is to be reported and if yes, what would be the base date from which the change is to be calculated.

Rule 23 deals with the compliances w.r.t. Special Notice. Rule 23 (1) is provided below:

(1) A special notice required to be given to the company shall be signed, either individually or collectively by such number of members holding not less than one percent of total voting power or holding shares on which an aggregate sum of not less than five lakh rupees has been paid up on the date of the notice.

Change: The words ‘”not less than five lakh rupees” shall be substituted with the words “not more than five lakh rupees”

This amendment, which clearly follows the language of Section 115 of the Act, is somewhat weird.

Prior to the amendment, the Rule suggested to correct the wrong language used in the Act, by providing as follows: Members, either singly or in aggregate, holding atleast 1% of the total voting power or atleastRs. 5 lakh worth of shares were allowed to issue special notice to the company.

Post the amendment the Rule read as:

Members, either singly or in aggregate, holding atleast 1% of the total voting power or not more thanRs. 5 lakh worth of shares shall be allowed to issue special notice to the company.

Does this mean that if a member holds more than Rs. 5 lakh worth of shares, he/shecannot serve a special notice on the company? Orin case of joint serving of notices, if the collective value of shares is more than Rs. 5 lakhs they will not be allowed to serve the special notice?

The whole intent of putting up limits was to discourage members from sending frivolous notices to companies and to allow members having substantial shareholding to serve such sensitive notices. With this amendment we are back to square one.

Rule 27 provides for ‘Maintenance and inspection of document in electronic form’. Rule 27 (1) is provided below:

(1) Every listed company or a company having not less than one thousand shareholders, debenture holders and other security holders, shall maintain its records, as required to be maintained under the Act or rules made there under, in electronic form.

Explanation.- For the purposes of this sub-rule, it is hereby clarified that in case of existing companies, data shall be converted from physical mode to electronic mode within six months from the date of notification of provisions of section 120 of the Act.

Change: In sub-rule (1) and in the Explanation, the word “shall”, shall be substituted with the word “may“.

Prior to the amendment, every listed company and every company having 1000 shareholders were mandatorily required to maintain its records (meaning any register, index, agreement, memorandum, minutes or any other document) in electronic form.

This also included mandatory conversion of existing records from physical mode to electronic mode within 30^th September, 2014 i.e. 6 months from the date of commencement.

This had created a huge responsibility on the companies to convert its existing data into electronic form. To make things worse, no base period from which such conversion was to be undertaken, meaning that companies in existence for over 100 years were required to convert its data for those 100 years into electronic form.

With the amendment (which is also in line with Section 120 of the Act), the necessity of such maintenance and conversion has been made optional for such companies. On one hand this might be seen as a good sign since maintenance of records in e-form should be a facility allowed to companies. However, the same should not impose unnecessary burden. On the other hand, this was done to avoid wastage of paper and to promote e-governance.