Article Contains updates on Notifications/ Circulars issued by MCA, SEBI, RBI, BSE, NSE in February 2019 and on Recent Important NCLT Order.

Updates includes updates on The Companies (Significant Beneficial Owners) Amendment Rules, 2019 – 8 February 2019, The Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2019, The Companies (Adjudication of Penalties) Amendment Rules, 2019, The Companies (Incorporation) Amendment Rules, 2019 , The Companies (Registration Offices and Fees) Amendment Rules, 2019, Circular issued on extension for last date of filing initial return in MSME Form 1 –   21 February 2019, Notification issued on repealing of the Companies Act, 1956 – 30 January 2019, Circular issued on Annual Secretarial Audit Report and Annual Secretarial Compliance Report for listed entities and their Material Subsidiaries – 8 February 2019, Circular issued on relaxation from requirement to furnish copy of PAN for transfer of equity shares of listed entities executed by non-residents – 11 February 2019 etc.

I. MINISTRY OF CORPORATE AFFAIRS UPDATES

Page Contents

A. Amendment to the Rules related to Companies Act, 2013

1. The Companies (Significant Beneficial Owners) Amendment Rules, 2019 (“Amended SBO Rules 2019”)

The MCA, vide its notification dated 8 February 2019, has amended SBO Rules, 2018 substituting all the provisions of the existing SBO Rules, 2018 except Rule 5 and Rule 6 with regards to the Register of Significant Beneficial Owner and Notice seeking information about significant beneficial owners respectively. The Amended SBO Rules 2019 came into force w.e.f. 8 February 2019.

Following are the key amendments made in the Amended SBO Rules 2019:

i. Key terms, inter-alia, such as “majority stake”, “Reporting Company” and “Significant Influence” have been defined under the Amended SBO Rules 2019.

ii. Meaning of SBO:

The definition of SBO has been amended as under:

“Significant Beneficial Owner in relation to a reporting company means an individual referred to in sub-section (1) of section 90, who acting alone or, together, or through one or more persons or trust, who possesses one or more of the following rights or entitlements in such company, namely:-

i. Holds indirectly, or together with any direct holdings, not less than ten percent of the shares;

ii. Holds indirectly, or together with any direct holdings, not less than ten percent of the voting rights in the shares;

iii. Has right to receive or participate in not less than ten percent of the total distributable dividend, or any other distribution, in a financial year through indirect holdings alone, or together with any direct holdings;

iv. Has right to exercise or actually exercises, directly or indirectly, significant influence or control, in any manner other than through direct holdings alone.”

Elaborating on above definition, the MCA has explained on the determination of the indirect and direct holdings of the rights and entitlements by an individual in the reporting Company, which are as follows:

1. Determination of indirect holding of right or entitlement:

If an individual does not hold any right or entitlement indirectly under sub-clause (i), (ii) and (iii) as per the definition of SBO, he shall not be considered as a SBO. Therefore, a person to be considered as SBO should have indirect holding in the reporting Company.

2. Determination of Direct holding of right or entitlement:

An individual shall be considered to hold a right or entitlement directly in the Reporting Company (“RC”), if he satisfies any of the following criteria:

i. Shares of the RC are held in the name of the individual himself;

ii. Holds or acquires a beneficial interest under section 89(2) of the Act and has made a declaration in this regard to the RC.

Impact: Individuals Holding shares ‘directly’ shall not be considered as a SBO and hence are not required to make any declaration under SBO Rules.

3. Determination of Indirect holding of right or entitlement:

Determination of Indirect holding of right or entitlement

4. ‘Acting Together’ – An individual or individuals acting through any person or trust, act with a common intent or purpose of exercising any rights or entitlements, or exercising control or significant influence, over a reporting company, pursuant to an agreement or understanding, formal or informal, such individual, or individuals, acting through any person or trust, as the case may be.

5. ‘Shares’, for the purpose of determining SBO, include instruments in the form of global depository receipts, compulsorily convertible preference shares or compulsorily convertible debentures.

iii. Rule 2A: Duty of the Reporting Company:

> Reporting Company to take necessary steps to find out if there is any individual who is it’s SBO, and if so, identify and cause him/her to make a declaration under Form BEN – 1.

> Every Reporting Company shall , give notice to its Member(s) (other than an individual(s)), holding not more than 10% of its

(a) shares, or

(b) voting rights, or

(c) right to receive or participate in the dividend or any other distribution payable in a financial year,

seeking information in accordance with Section 90(5) of the Act, in Form No. BEN – 4

iv. Rule 3: Declaration by SBO

> Every SBO shall give declaration in Form BEN-1 to the reporting Company within 90 days from 8 February 2019 i.e. by 8 May 2019;

> Every individual, who becomes SBO subsequently or where his/her SBO undergoes any change shall file a declaration in Form No. BEN-1 to the reporting company, within 30 days of acquiring such SBO or any change therein.

> Where an individual becomes a SBO, or where his SBO undergoes any change by 8 May 2019, it shall be deemed that such individual became the SBO or any change therein happened on 8 May 2019, and the period of 30 days for filing will be reckoned accordingly.

v. Rule 4: Filing of Return of SBO

The declaration of beneficial interest received by the Reporting Company in Form BEN-1, is required to be filed in Form No. BEN-2 with the Registrar, within a period of 30 days from the date of receipt of declaration by it along with the fees prescribed in the Companies (Registration offices and fees) Rules, 2014.

Reporting Company to maintain a register of the interest declared and any changes therein in Form BEN – 3.

vi. Rule 7: Application to the Tribunal

Reporting Company shall apply to the Tribunal where:

i. Any person fails to give information required by the notice in Form BEN-4 within the time specified; or

ii. Information is not satisfactory,

in accordance with sub-section (7) of section 90, for order directing that the shares in question be subject to restrictions, including –

(a) restrictions on the transfer of interest attached to the shares in question;

(b) suspension of the right to receive dividend or any other distribution in relation to the shares in question;

(c) suspension of voting rights in relation to the shares in question;

(d) any other restriction on all or any of the rights attached with the shares in question.

vii. Rule 8: Non-Applicability of the SBO Amendment Rules:

The Amended SBO Rules 2019 shall not apply to the extent the share of the Reporting Company is held by the following:

> IEPF Authority constituted under section 125(5) of the Act;

> Holding Reporting Company (“RC”) and the details of such holding RC shall be reported in Form BEN-2.

> The Central Government, State Government or any local Authority;

> (i) a RC, or (ii) a body corporate, or (iii) an entity, controlled by the Central Government or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments;

> SEBI registered Investment Vehicles such as Mutual Funds, Alternative Investment Funds (AIF), Real Estate Investment Trusts (REITs), Infrastructure Investment Trust (lnVITs) regulated by SEBI,

> Investment Vehicles regulated by RBI, or Insurance Regulatory and Development Authority of India, or Pension Fund Regulatory and Development Authority

Revised Format of Form Nos. BEN-1, BEN-2, BEN-3 and BEN-4 has been provided in the amended rules but the electronic version of Form No. BEN – 2 is still to be deployed by MCA.

2. The Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2019

The MCA, vide notification dated 7 August 2018, had amended The Companies (Prospectus and Allotment of Securities) Rules, 2014 whereby, interalia, the requirement of having a minimum allotment size of an investment value of Rs. 20,000/- under Private Placement Offer was omitted.

In line with the said amendment, the MCA, vide notification dated 19 February 2019, has issued The Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2019, whereby the return of allotment to be filed with the Registrar in e-form PAS-3 has been modified as under:

In Form PAS – 3 to be filed for return of allotment, against serial number 6(b), the check box pertaining to “not allotted securities with an application size of less than twenty thousand per person” shall be omitted.

3. The Companies (Adjudication of Penalties) Amendment Rules, 2019

The MCA, vide notification dated 19th February 2019, has issued the Companies (Adjudication of Penalties) Amendment Rules, 2019, whereby the provisions relating to Adjudication of Penalties (Rule 3 of the Companies (Adjudication of Penalties) Rules, 2014) have been substituted.

Gist of the modifications made in the said rules are as under:

> Sub-rule 2:

Time period for company and officer in default to submit the response to show cause notice issued by Adjudicating Officer has been reduced to 15 days as against earlier 45 days;

> Sub-rule 3:

The show cause notice to clearly mention the nature of non-compliance/default and also mention the relevant penal provisions of the Act and the maximum penalty which can be imposed. Proviso of earlier sub-rule (2) has been made part of the sub-rule (3);

> Sub-rule 4 (New provision):

Reply to the notice shall be filed in electronic mode only, within the period specified in the notice, provided the adjudicating officer may extend it to a further period of 15 days, if the Company or officer in default or any other person provides the reasons of delay and sufficient cause for delay;

> Sub-rule 5:

On the basis of reply submitted, the adjudicating officer can also ask for physical appearance by issuing notice within ten working days of date of receipt of reply;

> Sub-rule 6:

The Company/officer may ask for an oral representation, personally or through authorised representative, in its reply in electronic mode;

> Sub-rule 7 (New Provision):

Adjudicating officer to pass an order:

i. Where physical appearance is not required: within 30 days of the expiry of the period referred in Rule 3(2) or of such extended period under Rule 3(5);

ii. Where physical appearance is required: within 90 days of date of issue of notice under Rule 3(2);

> Sub-rule 8:

Every order of the Adjudicating officer shall be signed and dated by him and also specify reasons for physical appearance;

> Sub-rule 9:

A copy of the order passed shall be sent to the Company or Officer in default or any other person or all of them and to the Central Government and also upload the copy of the order on the website.

> Sub-rule 10:

Powers of the Adjudicating Officer:

i. To summon and enforce the attendance of any person acquainted with facts and circumstances, after recording reasons in writing;

ii. To order for evidence or to produce any documents, relevant to the subject matter;

> Sub-rule 11:

If any person fails to reply to the notice or neglects or refuses to appear as required, the adjudicating officer may pass an order imposing penalty after recording reasons in writing;

> Sub-rule 12:

While imposing penalty following factors shall also be considered:

i. Size of the Company;

ii. Nature of business carried on by the Company;

iii. Injury to public interest;

iv. Nature of the default;

In addition to the Repetition of the default, amount of disproportionate gain or unfair advantage wherever quantifiable, made as a result of the default; and amount of loss caused to an investor or group of investors or creditors because of the default.

in no case, the penalty imposed shall be less than the minimum penalty prescribed, if any, under the relevant section of the Act.

> Sub-rule 13 (new provision):

If fixed sum of penalty is provided for a default, the Adjudicating Officer shall impose that fixed sum.

> Sub-rule 14 and 15 (new provision):

Penalty to be paid through Ministry of Corporate Affairs Portal and shall be credited to the Consolidated Fund of India.

> Service of notice and documents under this rule shall be done in the manner specified under Section 20 of the Act read with applicable rules made thereunder and details of address shall be as per the KYC documents filed in the registry.

> The requirement of submission of replies in electronic mode shall become mandatory after creation of e-adjudication platform.

4. The Companies (Incorporation) Amendment Rules, 2019

With a view to identify the Active Companies and to verify their Registered Office, the MCA, vide its notification dated 21 February 2019, introduced Active Company Tagging Identities and Verification through The Companies (Incorporation) Amendment Rules, 2019 (“Rules”). The said Rules provide for amendment of The Companies (incorporation) Rules, 2014 by insertion of new Rule 25A. Brief of the same is given hereunder:

> Rule 25A: Active Company Tagging Identities and Verification (ACTIVE)

i. Companies incorporated on or before 31 December 2017 shall file the particulars of the Company and its registered office in e-form INC 22A – (Form ACTIVE – Active Company Tagging Identities and Verification) on or before 25 April 2019.

ii. Failure to file Form ACTIVE by 25 April 2019:

a. The company shall be tagged as “ACTIVE-non-compliant” and shall be liable for action under section 12(9) of the Act;

b. The Registrar shall not accept any of the following event-based information or changes from companies marked as “ACTIVE non-Compliant”

– SH-07 (Change in Authorised Capital);

– PAS-03 (Change in Paid-up Capital);

– DIR- 12 (Changes in Director except cessation);

– INC-22 (Change in Registered Office);

– INC-28 (Amalgamation, de-merger)

iii. Companies have option of filing the said e-form on or after 26 April 2019 on payment of late fee of Rs. 10,000 and post which their status shall be marked as “Active Compliant”.

iv. Companies which will not be allowed to e-file Form ACTIVE:

– Not filed its financial statements under Section 137 (Form AOC-4); and / or

– Not filed annual returns under section 92 (MGT-7)

unless such company is under management dispute and the same is recorded by the Registrar.

v. Companies not required to file e-form ACTIVE:

1. Companies struck – off or under process of striking-off;

2. Companies under liquidation;

3. Companies Amalgamated or dissolved

Information to be filled in the e-form:

Apart from Details of Directors, Cost Auditors, if any, Statutory Auditors , MD, CFO, CS etc. which are prefilled by system, Companies need to provide Latitude Longitude of Regd. Office address and upload photograph of Registered Office (External photo) + photo of internal office with One Director/ KMP in that Photo, whose digital sign is affixed in the Form. There is also OTP based verification at e-mail ID of Company and form is required to be certified by PCS.

The amended rules came into force with effect from 25 February 2019. 

5. The Companies (Registration Offices and Fees) Amendment Rules, 2019

The MCA, vide notification dated 21 February 2019, has issued The Companies (Registration Offices and Fees) Amendment Rules, 2019 for amending the existing Companies (Registration Offices and Fees) Rules, 2014 to provide for the fee for filing e-Form ACTIVE under Rule 25A of the Companies (Incorporation) Rules, 2014, as follows:

Fees payable if e-form ACTIVE filed on or before 25 April 2019
Fees payable if e-form ACTIVE filed on or after 26 April 2019 Rs. 10,000

The amended rules came into force with effect from 25 February 2019. 

B. Circulars issued by the MCA

1. Extension for last date of filing initial return in MSME Form 1

The MCA, vide notification dated 22 January 2019, had interalia, mandated every specified company to file in MSME Form I details of all outstanding dues to Micro or small enterprises suppliers existing on the date of notification of this order within 30 days from the date of publication of this notification i.e. by 20 February 2019.

Pending the deployment of MSME Form I and in order to avoid inconvenience to stakeholders on account of various factors, the MCA, vide circular no. General Circular No. 01/2019 dated 21 February 2019, has extended the last date of filing initial return in MSME Form 1 to 30 days from the date the e-form MSME -1 is deployed on MCA 21 Portal. The Form is yet to be deployed.

C. Notification issued by the MCA

1. The Companies Act, 1956 stands repealed w.e.f. January 30, 2019

The MCA vide notification dated 30 January 2019 has notified Section 465 of the Act, effective 30 January 2019 thereby repealing the provisions of the Companies Act, 1956.

This essentially means that effective 30 January 2019, the provisions of the Companies Act, 1956 are no longer in force barring the provisions which relate to Producer Companies (Part 9A) and the Registration of Companies (Sikkim) Act, 1961.

D. SECURITIES AND EXCHANGE BOARD OF INDIA UPDATES

1. Circular issued on format for annual secretarial audit report and annual secretarial compliance report for listed entities and their material subsidiaries

Pursuant to Regulation 24A of the Listing Regulations, every listed entity and its material subsidiaries, incorporated in India, is mandated to undertake Secretarial Audit and shall annex with its Annual Report, a secretarial audit report given by a Company Secretary in Practice, w.e.f. 31 March 2019.

In line with the above amendment and to avoid duplication of the Secretarial Audit being carried out by companies under section 203 of the Act, SEBI has, vide circular no. CIR/CFD/CMD1/27/2019 dated 8 February 2019, introduced an additional secretarial compliance reporting for listed companies, on an annual basis by a practicing company secretary, on compliance of all applicable SEBI Regulations and circulars/ guidelines issued thereunder. SEBI has vide said circular also prescribed the format for annual secretarial audit report.

Brief of the circular is given hereunder:

1. Every listed entity and its unlisted material subsidiaries shall continue to use Form No. MR-3 as required under Companies Act, 2013 and the rules made thereunder for the purpose of compliance with Regulation 24A of the Amended Listing Regulations.

2. An Annual Secretarial Compliance Report shall be submitted by the listed entity to the Stock Exchanges within 60 days of the end of the financial year, in the format prescribed in Annex A of the circular.

3. ICSI may consider issuing a guidance note to Practising Company Secretaries to enable them to undertake certifications in accordance with the Regulations and this circular in letter and in spirit.

The circular is effective from the financial year ended 31 March 2019. 

2. Circular issued on relaxation from requirement to furnish a copy of PAN for transfer of equity shares of listed entities executed by non-residents

As per the provisions of Regulations 40 and 61 read with Schedule VII of the Listing Regulations, the transferee(s) as well as transferor(s) of securities is mandated to furnish a copy of their PAN card to the listed entity for registration of transfer of securities.

SEBI, vide circular no. SEBI/HO/MIRSD/DOS3/CIR/P/2019/30 dated 11 February 2019, has granted relaxation to Non-Resident Indians (NRIs), Overseas Citizens of India (OCIs), Persons of Indian Origin (PIOs) and foreign nationals, from the requirement of furnishing PAN for transfer of equity shares and permitted them to transfer equity shares held by them in listed entities to their immediate relatives subject to on fulfilment of following conditions:

i. Relaxation shall only be available for transfers executed after 1 January 2016.

ii. Relaxation shall only be available to non-commercial transactions, i.e. transfer by way of gift among immediate relatives.

iii. Non-resident shall provide copy of an alternate valid document to ascertain identity as well as the non-resident status.

“Immediate Relative” shall have the same meaning as defined in Regulation 2(1)(l) of SEBI SAST Regulations.

The circular is effective from 11 February 2019. 

E. CIRCULARS ISSUED BY STOCK EXCHANGES TO LISTED ENTITIES

1. Filing of Annual Reports in XBRL Mode

BSE, vide circular no. LIST/COMP/40/2018-19 dated 8 February 2019, has introduced the facility of filing of Annual Report in XBRL mode, through the BSE Listing Center, under Regulation 34 of the Listing Regulations. Brief of the same is given hereunder:

i. BSE has adopted the XBRL taxonomy issued by the MCA for submission of Financial Statements in XBRL mode and all the listed entities can submit to the Exchange, the Annual Report prepared using the same taxonomy;

ii. Filing of Annual Report in XBRL mode is mandatory for the periods ending 31 March 2019 and in addition to the existing PDF mode;

iii. Listed entities have an option of filing their Annual Report for FY 2017-18 also in XBRL on the BSE Listing Centre to test the system and get the feel of ease of filing.

2. Deficiencies in disclosures related to Pledge of Shares

As per Regulation 31 of the SEBI SAST Regulations, the Promoter of every target Company shall disclose details of shares in such target company encumbered by him or by persons acting in concert with him in such form as may be specified.

SEBI vide circular dated 5 August 2015 had revised the format to provide the name of the entity in whose favour shares are encumbered including the name of both the lender and the trustee who may hold shares directly or on behalf of the lender.

However, the Stock Exchanges have observed that the Promoters of the Listed Entities have not provided the details of name of the entity in whose favour shares have been encumbered including the name of both the lender and the trustee who may hold shares directly or on behalf of the lender.

In view of the above, BSE and NSE, vide circulars LIST/COMP/43/2018-19 dated 19 February 2019 and NSE/CML/2019/04 dated 18 February 2019 respectively, have requested all Listed entities to inform and sensitize their promoters to comply with requirements and ensure that the disclosure filed by them is complete in all respects and is in compliance with the SEBI (SAST) Regulation, 2011 and SEBI Circular dated August 05, 2015.

3. Service of Notice of the court convened meeting for Schemes of Compromise, Arrangement, Amalgamation as well as Reduction of Capital (Schemes) through the Listing Centre

With a view to have a better transparency in processing the notices served upon the Stock Exchange under Sections 66 and 230(5) of the Act read with Rule 3 and Rule 8 of Companies (Compromises, Arrangements and Amalgamations) Rules 2016 respectively, BSE Ltd. vide circular no. LIST/COMP/44/2018-19 dated 26 February 2019, has introduced an online system of serving such Notice along with the relevant documents of the proposed schemes through the BSE Listing Centre.

Consequently, any service of notice under Section 230(5) or Section 66 of the Act, by listed entities for seeking Exchange’s representations or objections if any, would only be accepted and processed through the BSE Listing Centre and no physical filings would be accepted.

The service of such notice can be filed through the Listing Module – NCLT.

F. SEBI INFORMAL GUIDANCES

1. Release of locked in shares issued under preferential basis under Regulation 167(6) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“SEBI (ICDR) Regulations 2018”)

Facts:

i. Jindal Steel and Power Limited (“the Company”) is a Company listed on National Stock Exchange of India Limited and BSE Ltd.

ii. Opelina Finance and Investment Limited (“Opelina”) is one of the promoter/promoter group entity of the Company.

iii. On 10 November 2017, the Company issued 4,80,00,000 warrants to Opelins on preferential basis under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (hereinafter referred to as the “erstwhile SEBI ICDR Regulations”). The warrants issued were unlisted and are convertible into equity shares of the Company at any time before the expiry of 18 months from the date of issue of warrants i.e. 9 May 2019.

iv. The entire pre-preferential allotment shareholding of Opelina is under lock-in till 30 November 2019, based on the Company’s interpretation of Regulation 78(6) under the erstwhile SEBI ICDR Regulations, reproduced as hereunder:

Regulation 78(6) – The entire pre-preferential allotment shareholding of the allottees, if any, shall be locked-in from the relevant date upto a period of six months from the date of trading approval.

v. SEBI has amended the erstwhile SEBI ICDR Regulations and on 11 September 2018 issued the SEBI (ICDR) Regulations, 2018 and the Regulation 78(6) under the erstwhile SEBI ICDR Regulations is numbered as Regulation 167(6) under the SEBI (ICDR) Regulations, 2018.

In Regulation 167(6) of the SEBI (ICDR) Regulations, 2018, they have inserted an additional provision stating that in case of preferential allotment of convertible warrants (where such warrants are not proposed to be listed), the pre-preferential allotment shareholding of the allottees, if any, shall be locked in from relevant date upto a period of 6 months from the date of allotment of such securities.

vi. SEBI had also provided informal guidance in the matter of Kesoram Industries Limited, PC Jewellers Limited and Balasore Alloys Limited, wherein it has been clarified that in the event of unlisted convertible warrants / securities, the lock-in of pre-preferential holding shall be for a period of six months from the date of allotment of such securities.

Queries Raised:

i. What shall be the periodicity of Lock–in of pre–preferential holding of the promoters share in the event of issue and allotment of warrants convertible into equity shares?

ii. Whether the pre-preferential holding of the promoters, which were put under locked-in, assuming the applicability of the then Regulation 78(6) of the SEBI (ICDR) Regulations, 2009 can be released in view of the above SEBI Informal guidance.

SEBI’s view on this matter

Query No. (i)

Pursuant to Regulation 78(6) of the erstwhile SEBI ICDR Regulations, the entire pre-preferential allotment shareholding of the allottees, if any, shall be locked-in from the relevant date upto a period of six months from the date of trading approval.

However, pursuant to the proviso to Regulation 167(6) of the SEBI (ICDR) Regulations, 2018, where the requirement of trading approval is not applicable to the warrants (i.e. where the holder of the warrants do not intend to list them within 18 months from the date of allotment), the lock-in period shall commence from the relevant date and end on the expiry of six months from the date of allotment of warrants.

Query No. (ii)

SEBI has stated that where the requirement of trading approval is not applicable to the warrants (i.e. where the holder of the warrants do not intend to list them within 18 months from the date of allotment), the lock-in period shall commence from the relevant date and end on the expiry of six months from the date of allotment of warrants. Since, the convertible securities were issued by the Company on 10 November 2017 to Opelina on preferential basis, the pre-preferential allotment shareholding of the allottee, if any, shall be locked-in from the relevant date upto a period of six months from the date of allotment of the warrants.

The Informal Guidance issued by SEBI can be accessed through the following web-link:

https://www.sebi.gov.in/enforcement/informal-guidance/jan-2019/informal-guidance-in-the-matter-of-jindal-steel-and-power-limited_41852.html

2. Lock in requirement applicability to pre-IPO allotment to Alternative Investments Funds under Regulation 37 of SEBI ICDR Regulations

Facts:

i. IIFL Private Equity Fund (“IIFL Trust”) is registered with the SEBI as a category II Alternative Investment Fund in accordance with the SEBI (Alternative Investment Funds) Regulations, 2012 and IIFL Asset Management Limited is the investment manager to the trust and all the schemes issued under the trust.

ii IIFL Special Opportunities Fund (“IIFL SOF”) and its further series i.e. IIFL Special Oppurtunities Fund – Series 2, Series 3, Series 4, Series 5 and Series 7 are the schemes launched under the IIFL Trust.

iii. The main objective of the schemes launched is to primarily invest in the portfolio of equity and equity related securities of Companies which are in Pre-IPO stage or have launched IPO.

iv. On 7 July 2017, IIFL Special Opportunities Fund made investment in the equity shares of ICICI Lombard General Insurance Company Limited (“ICICI Lombard”).

v. ICICI Lombard came out with its IPO with open offer from 15 September 2017 to 19 September 2017 and on 23 October 2017 shares were allotted consequent to IPO and lock in was made by ICICI Lombard for period of one year from 24 October 2017 to 23 October 2018 for the pre-IPO investments made.

Query raised:

When does the lock-in period of one year for investment made by Category I and II Alternative Investment Fund schemes commence in case of investment by such AIF Schemes before the IPO of Companies i.e. is it from the date of purchase or from the date of IPO allotment.

SEBI’s views on this matter:

1. Regulation 37 of the SEBI ICDR Regulation deals with the Lock-in requirements of specified securities held by persons other than promoters. In case of an IPO, the entire pre-issue capital held by persons other than promoters shall be locked-in for a period of one-year. However, the said requirements would not be applicable in the following two situations provided under sub-regulation (a) and (b) of Regulation 37, subject to compliance with provisos provided therewith:

a. equity shares allotted to employees under an employee stock option or employee stock purchase scheme of the issuer prior to the initial public offer, if the issuer has made full disclosures with respect to such options or scheme;

b. equity shares held by a venture capital fund or alternative investment fund of category I or category II or a foreign venture capital investor;

2. In terms of Regulation 37(b) of the SEBI ICDR Regulations nothing therein shall apply to equity shares held by a venture capital fund or alternative investment fund of category I or category II or a foreign venture capital. However, as per the proviso to Regulation 37(b), such equity shares shall be locked in for a period of at least one year from the date of purchase by the venture capital fund or alternative investment fund.

3. In view of the above, the shares held by AIF II in ICICI Lombard pre-IPO shall be locked in for a period of at least one year from the date of purchase by the AIF.

The above SEBI Informal guidance can be accessed through the following web-link:

https://www.sebi.gov.in/enforcement/informal-guidance/feb-2019/informal-guidance-in-the-matter-of-iifl-asset-management-limited_41974.html

G. OTHER REGULATORY UPDATES

1. Relaxation of ECB framework for Resolution Applicants

The RBI vide RBI/2018-19/121 A.P. (DIR Series) Circular No. 18 dated 7 February 2019 have relaxed the end-use restrictions for resolution applicants under the Corporate Insolvency Resolution Process.

As per the existing ECB Policy framework dated 16 January 2019, Indian Companies can raise funds in either foreign currency or Indian Rupees and the proceeds raised through ECB cannot be utilized for repayment of domestic Rupee loans, except when the ECB is availed from a Foreign Equity Holder, as defined in the aforesaid framework.

RBI in consultation with the Government of India, has decided to relax the end-use restrictions for resolution applicants under the Corporate Insolvency Resolution Process (CIRP) and allow them to raise ECBs from the recognised lenders, for repayment of Rupee term loans of the target company under the approval route, but the ECB’s cannot be raised from the branches/ overseas subsidiaries of Indian banks.

Accordingly the resolution applicants, who are otherwise eligible borrowers, can forward such proposals to raise ECBs, through their Authorised Dealer bank, to Foreign Exchange Department, Central Office, Mumbai of the Reserve Bank of India for approval.

All the other provisions of the ECB policy remain unchanged and the amended ECB policy will come into force with effect from the date of the circular i.e. 7 February 2019.

2. Investment by FPI in Debt

Reserve Bank of India (RBI), vide RBI/2018-19/123 A.P. (DIR Series) Circular No. 19 dated 15 February 2019, has made amendment in investment by Foreign Portfolio Investors (FPI) in Debt.

RBI, vide its circular no. RBI/2017-18/199 A.P. (DIR Series) Circular No. 31 dated 15 June 2018, had inter-alia restricted investment by FPI’s in a single corporate (including exposure to entities related to the corporate) to 20% of its corporate bond portfolio.

In order to encourage a wider spectrum of investors to access the Indian corporate debt market, RBI vide their circular dated 15 February 2019, has withdrawn the said provision with effect from 15 February 2019 thereby removing the cap on investments by FPI in Debt.

3. Amendments to the Indian Stamp Act, 1899

The Finance Bill, 2019, has proposed certain amendments in the Indian Stamp Act, 1899, for bringing uniformity in the levy of stamp duty on securities across states, whether through physical or dematerialized form. The amendments also seek to introduce a legal and institutional mechanism to enable states to collect stamp duty on securities market instruments at one place by one agency (through the Stock Exchanges or Clearing Corporations authorised by the stock exchange or by the Depositories) on one Instrument. A mechanism for appropriately sharing the stamp duty with relevant State Governments based on state of domicile of the buying client is also proposed.

Brief the key amendments proposed to be made are as follows:

1. From the definition of Bonds, debentures has been excluded.

2. Definition of following key terms have been inserted:

a. “allotment list” means a list containing details of allotment of the securities intimated by the issuer to the depository under sub-section (2) of section 8 of the Depositories, Act, 1996;

b. “Debenture” includes:

(i) debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not;

(ii) bonds in the nature of debenture issued by any incorporated company or body corporate;

(iii) certificate of deposit, commercial usance bill, commercial paper and such other debt instrument of original or initial maturity upto one year as the Reserve Bank of India may specify from time to time;

(iv) securitised debt instruments; and

(v) any other debt instruments specified by the Securities and Exchange Board of India from time to time;

c. “market value”, in relation to an instrument through which—

(a) any security is traded in a stock exchange, means the price at which it is so traded;

(b) any security which is transferred through a depository but not traded in the stock exchange, means the price or the consideration mentioned in such instrument;

(c) any security is dealt otherwise than in the stock exchange or depository, means the price or consideration mentioned in such instrument;

d. “Securities” includes—

(i) securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956;

(ii) a “derivative” as defined in clause (a) of section 45U of the Reserve Bank of India Act, 1934;

(iii) a certificate of deposit, commercial usance bill, commercial paper, repo on corporate bonds and such other debt instrument of original or initial maturity upto one year as the Reserve Bank of India may specify from time to time; and

(iv) any other instrument declared by the Central Government, by notification in the Official Gazette, to be securities for the purposes of this Act;

e. “stock exchange” includes—

(i) a recognised stock exchange as defined in clause (f) of section 2 of 1956. of the Securities Contracts (Regulation) Act, 1956; and

(ii) such other platform for trading or reporting a deal in securities, as may be specified by the Central Government, by notification in the Official Gazette, for the purposes of this Act.’.

3. Definition of “Instrument” has been substituted as under:

instrument” includes—

(a) every document, by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded;

(b) a document, electronic or otherwise, created for a transaction in a stock exchange or depository by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded; and

(c) any other document mentioned in Schedule I, but does not include such instruments as may be specified by the Government, by notification in the Official Gazette;

4. Stamp Duty on transfers of dematerialized securities– Section 8A

Transfer of dematerialized securities between beneficial owners was earlier exempted from stamp duty provisions under section 8A(c)(ii) & (iii) of the Act. The same has now been deleted and the exemption is only limited to transfer of securities from a person to a depository or from a depository to a beneficial owner.

5. New sections 9A and 9B have been introduced providing payment of stamp duty on instruments issued, sold or transferred. Brief of same is as under:

Transaction type Stamp duty to be collected by Stamp Duty to be paid by
Section 9A: On stock exchanges and depositories
Sale of any securities on stock exchange, whether delivery basis or otherwise (eg. listed securities) Stock Exchange or Clearing corporation (on behalf of the State Government) Buyer
Transfer of securities for consideration by a depository, whether delivery basis or otherwise (eg. unlisted securities) Depository (on behalf of the State Government) Transferor of securities
Issue of Securities resulting in creation or change in the records of a depository Depository (on behalf of the State Government) Issuer of Securities
Section 9B: Otherwise than through Stock Exchanges and Depositories
Issue of securities Issuer of securities at the place of its registered office
Sale or transfer or reissuance of securities for consideration Seller or transferor or issuer

6. Stamp duty chargeable under Section 9A shall be on the principal instrument and no stamp duty will be charged on any other instrument relating to the transaction and from the date of commencement of this Part, no stamp-duty shall be charged or collected by the State Government on any note or memorandum or any other document, electronic or otherwise, associated with the transactions mentioned therein;

7. Stamp Duty collected under Section 9A, by the stock exchange, clearing corporation, depository, as the case maybe, shall be transferred within three weeks of the end of each month as under:

– to the State Government where the residence of the buyer is located;

– in case the buyer is located outside India, to the State Government having the registered office of the trading member or broker of such buyer; and

– in case where there is no such trading member of the buyer, to the State Government having the registered office of the participant;

8. Every stock exchange or the clearing corporation authorised by it and depository shall submit to the Government details of the transactions under section 9A;

9. The market value for calculating the payment of stamp duty payable on various type of securities is as under:

Security Market Value
Traded in Stock Exchange The price at which it is so traded
Transferred through depository but not traded in stock exchange The price or consideration mentioned in the instrument of transfer;
Dealt otherwise than on the Stock Exchange or Depository The price or consideration mentioned in such instrument;
For options in any securities The premium paid by the buyer;
For repo on corporate bonds The interest paid by the borrower;
For Swap The first leg of the cash flow

10. Provisions of section 29 – who shall pay the stamp duty in absence of agreement to the contrary, are also proposed to be amended.

11. Stamp duty rates on following instruments as provided in Schedule I are modified as under:

Type of Instruments Rate of Stamp Duty payable
Debentures (revised Article 27)
For issue of debenture 0.005%
For transfer and re-issue of debenture 0.0001%
Securities other than Debentures (new Article 56A)
For issue of security other than debenture 0.005%
For transfer of security other than debenture on delivery basis 0.015%
For transfer of security other than debenture on non-delivery basis 0.003%
Derivatives
– futures (equity and commodity) 0.002%
– options (equity and commodity) 0.003%
– currency and interest rate derivatives 0.0001%
– other derivatives 0.002%
Government securities 0%
Repo on corporate bonds 0.00001%

12. Stamp duty of following instruments is proposed to be omitted:

– Letter of Allotment of Shares (No. 36);

– Transfer, whether with or without consideration, on shares in an incorporated company or other body corporate and the entries relating thereto (No. 62 (a));

– Transfer, whether with or without consideration, debenture being marketable securities whether the debenture is liable to duty under section 8 and the entries relating thereto (No. 62 (b))

13. The President of India, has on 21 February 2019, gave his assent to the Amendments to the Indian Stamp Act, 1899 which were introduced as part of the Finance Act 2019.

H. Other updates

1. Increase in timelines for processing of Dematerialisation Requests

NSDL vide circular no. NSDL/POLICY/2019/0007 dated 30 January 2019, has informed the Participants that based on representation made, SEBI has granted a relaxation in timelines for processing of Dematerialisation Requests by the Issuer or its Registrar & Transfer Agent, to 30 days till June 30, 2019 from the current 15 days as specified in Regulation 74(5) of SEBI (Depositories and Participants) Regulations, 2018.

The said circular can be accessed through the following link:

https://nsdl.co.in/downloadables/pdf/2019-0007-Policy-Increase%20in%20timelines%20for%20processing%20of%20Dematerialisation%20Requests.pdf

I. NATIONAL COMPANY LAW TRIBUNAL ORDERS (“NCLT”)

AUDITOR WHO “KNEW NOTHING”, BANNED FOR FIVE YEARS BY NCLT – This is the first time the NCLT has banned an auditor in such a fashion.

1. NCLT order dated 6 February 2019: Union of India, Ministry of Corporate Affairs V/s. Mukesh Choksi and Zen Shaving Limited under Section 140(5) of the Act

Petitioner – Ministry of Corporate Affairs (“MCA”)

Respondent No. 1 – Mr. Mukesh Choksi (“Mr. Choksi”

Respondent No. 2 – Zen Shaving Limited, Public Limited Company (registered on 7 March 1995) (“Zen”)

Facts of the case:

1. MCA had filed the petition under Section 140(5) of the Act against Mr. Choksi and Zen.

2. Zen came out with Initial Public Officer (IPO) and issued prospectus to raised public funds on 10.10.1996, proposing to list its shares on the Pune Stock Exchange but failed to do so.

3. Choksi, proprietor of Mukesh M Choksi & Company (Firms Reg. No. 131513W) was statutory auditor of Zen during the financial years 2014-15 and 2015 – 16 and failed to file the requisite forms with Registrar of Companies.

4. On receipt of multiple complaints by Mr Jagdip H Vaishnav, (an IPO applicant), relating to the alleging syphoning of money, MCA ordered inspection of Zen under Section 206 (5) of the Companies Act 2013. The sum and substance of the allegations raised in the complaints are as follows;

(i) Shares are not listed on the Pune Stock Exchange;

(ii) They are syphoning of investors’ money;

(iii) The Company has not issued a financial statement after 1995;

(iv) Company changes registered office frequently;

(v) No company representative attends calls given by ROC Mumbai;

(vi) Investors are complaining about serious irregularities but do not get any response from Regulators, Investigating Agencies.

5. An inspection report was submitted based on the above allegations stating that the letters issued by the petitioner were not answered by the Zen and were returned with remark “left”.

6. Further, Zen had filed the Annual financial statements and Annual Returns up to the financial year 2015 – 16, which were signed on 5 September 2016 by Mr Arvind Goyal Babulal, the Chairman of Zen.

7. Zen during the inspection made the statement on oath that he has signed the Auditor’s Report, without examining books of accounts of Zen, Company and also replied as “I Don’ know” to a string of basic questions asked during the inspection.

8. Registered Office of Zen also did not exist.

Order passed by NCLT

1. The Mumbai bench of the National Company Law Tribunal (NCLT) on 6 February 2019, barred Mr. Choksi from being appointed as an auditor of any Company for a period of five years from the date of passing the order, holding him guilty of signing off on a Company’s books without inspection and colluding with its promoters in a fraudulent manner and that Mr. Choksi shall be liable for action under Section 447 of the Act.

2. The order also stated that Mr. Choksi to refund the remuneration received by him, during the period he acted as Auditor, back to the Company.

3. The NCLT in its order also directed that the copy of the order be sent to National Financial Reporting Authority (NFRA) and ICAI “to take proper action as they may deem fit”.

4. The NCLT in its order has stated that “In the present times when the national economy is highly dependent upon the profitability and credibility of commercial institutions, the role of statutory auditors is becoming a very important tool of keeping a check and preventing re-occurrence of scams like Satyam” and “The role of a statutory auditor is vital, and auditor owes a fiduciary duty towards the nation. It is necessary to take stern action against the person who has tried to diminish the credibility of the auditor’s profession… We hope the ICAI will take necessary action against auditor for his professional misconduct”.

GLOSSARY

Act The Companies Act, 2013
ECB External Commercial Borrowing
FPI Foreign Portfolio Investor
SEBI ICDR Regulations The Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018
Listing Regulations The Securities and Exchange Board of India (Listing Obligations and Disclosure Requirement) Regulations, 2015
MCA Ministry of Corporate Affairs
RBI Reserve Bank of India
SEBI The Securities and Exchange Board of India
SBO Rules, 2018 The Companies (Significant Beneficial Owners) Rules, 2018
SBO Significant Beneficial Owner
SEBI SAST Regulations The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

Released under the guidance of Ms. Brijbala Batwal.

Prepared by: Ruchie Khanna & Archana Mudaliar

Disclaimer: All views in this Newsletter are expressed by the concerned individuals only and are not the views of the Department or the Company, with whom we are employed.

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