Procedure of Issuance of Compulsorily Convertible Preference Shares (CCPS) To A Person Resident Outside India (PROI)
Summary: Issuing Compulsorily Convertible Preference Shares (CCPS) to a person resident outside India (PROI) involves strict compliance with various regulations under Indian law. The procedure starts with the company initiating a rights issue or preferential allotment, adhering to the Companies Act, 2013, and the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. Key considerations include ensuring the permissibility of issuing CCPS, which are treated as equity instruments and subject to Foreign Direct Investment (FDI) regulations. The CCPS must be issued in dematerialized form, and companies must obtain government approval if the investor is from a bordering country. Other steps include the valuation of shares, board approvals, convening general meetings, and compliance with sectoral caps. The allotment process requires filing returns with the Registrar of Companies, maintaining share registers, and submitting necessary filings such as Form FC-GPR for FDI reporting. The company must also submit annual returns for foreign liabilities to the Reserve Bank of India (RBI). Strict adherence to applicable laws is crucial to ensure compliance and avoid legal risks.
Introduction
The issuance of compulsory convertible debentures to a person resident outside India (Hereinafter PROI) shall have to comply with numerous legal requirements.
The process through which the company shall issue compulsorily convertible preference shares (CCPS) shall be known as Rights Issue (preferential allotment under Section 62(1)(c) r/w Section 42 of the Companies Act, 2013.)
Applicable Laws
Issuing the CCPS to PROI, a company has to to comply with the following laws and regulations:
- Companies Act, 2013 and Companies (Prospectus and Allotment of Securities) Rules, 2014 and Companies (Share Capital and Debentures) Rules, 2014 and other ancillary rules.
- Foreign Exchange Management Act, 1999 and Foreign Exchange Management (Non-debt Instruments) Rules, 2019 [FEM (Non-Debt) Rules] , Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 and other ancillary rules.
Key Considerations to be kept in mind before issuance of CCPS to the PROI:
Permissibility:
The FEM (Non-Debt) Rules permit the issue of preference shares as equity instruments under the act.[1]
Treatment:
- The treatment of such investment by the PROI shall be treated as FDI[2] and the applicable laws relating to FDI;
Dematerialisation:
The CCPS shall be issued in a dematerialized form.[3]
Restrictions on Bordering Countries:
- If the PROI is from a country that shares borders with India (example Bhutan, Bangladesh, Nepal etc.) they shall obtain Government route approval for issuance.[5]
- Sectoral caps and Approval Requirements: The issuing Company shall refer to Schedule I of the FEM (Non-Debt) Rules to check the sectoral cap on the types of business.
Valuation:
- The valuation of the CCPS issued by the company shall be in the valuation of equity instruments done as per any internationally accepted pricing methodology for valuation on an arm’s length basis duly certified by a Chartered Accountant or a Merchant Banker registered with the Securities and Exchange Board of India or a practicing Cost Accountant.[6]
Taxation:
- All transaction under these rules shall be undertaken through banking channels in India and subject to the payment of applicable taxes and other duties or levies in India
Procedure
| S.No. | Step | Details | Applicable Law | Timeline |
| 1) | Notice of Board Meeting | The Notice shall be sent to the Board members members specifying the date, time venue of the meeting along with the agenda of the meeting. | Secretarial Standards -1 (SS-1). | Not less than seven days before such meeting. |
| 2) | Board Meeting for approval of issuance of CCPS and convening of General Meeting. | Before the Approval of the issuance of the CCPS the Board shall look into the following:
The Board shall approve and pass the following resolution:
The Board meeting shall require the following compliance: 1. Sending notice of the meeting specifying the date, time venue of the meeting along with the agenda of the meeting along not less than seven days before the date of such meeting. 2. The meeting of the Board of the directors should be held with compliance to the provisions of the Companies Act, 2013 and Secretarial Standards -1 (SS-1). 3. The Quorum of the board meeting shall be 1/3 of the total strength of the Board or two directors whichever is higher. |
Board Meeting:
CCPS
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| 3) | Circulation of draft minutes to all the directors | The Draft Minutes of the Board Meeting shall be circulated to all the Directors and they shall confirm or comment in that draft minutes within seven days. | Rule 3 of the Companies (Meetings of the Board and its Powers) Rules, 2014 | Within 15 days of the meeting via (Registered Post/Speed Post/Email). |
| 4) | Filling of minutes of meeting with the ROC | After the minutes has been approved by all the directors, MGT-14 form should be filed with the Registrar of Companies of passing the board resolution. |
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Within 30 days of passing such resolution filed along with the notice of such meeting. |
| 5) | Notice of General Meeting | Notice
Explanatory Statement a) the nature of such shares; b) identified persons. c) Draft Offer cum Application Letter. d) the size of the issue and number of preference shares to be issued and nominal value of each share; e) particulars of the offer including date of passing of Board resolution; f) the objectives of the issue; g) the manner of issue of shares; h) the price at which such shares are proposed to be issued; i) the basis on which the price has been arrived at; j) the terms of issue, including terms and rate of dividend on each share, etc.; k) the terms of redemption, including the tenure of redemption, redemption of shares at premium and if the preference shares are convertible, the terms of conversion; l) the manner and modes of redemption; m) the current shareholding pattern of the company; n) the expected dilution in equity share capital upon conversion of preference shares. n)l) the class or classes of persons to whom the allotment is proposed to be made; o) The pre issue and post issue shareholding pattern; p) intention of promoters, directors or key managerial personnel to subscribe to the offer; q) the proposed time within which the allotment shall be completed; r) the names of the proposed allottees and the percentage of post preferential offer capital that may be held by them; s) the change in control, if any, in the company that would occur consequent to the preferential offer; t) the number of persons to whom allotment on preferential basis have already been made during the year, in terms of number of securities as well as price; |
Notice
Explanatory Statement a) Section 102 of the Companies Act, 2013 b) Rule 9 & 13 Companies (Share Capital and Debentures) Rules, 2014 c) Rule 14 Companies (Prospectus and Allotment of Securities) Rules, 2014. |
Not less than 21 days before such meeting |
| 6) | Passing of Special Resolution for issuance of ESOPs | The Shareholder shall pass a special resolution (the votes for approval of the issuance of CCPS to the PROI shall be ¾ of the total votes.)
The minutes of the Resolution shall contain the following details: (a) the priority with respect to payment of dividend or repayment of capital vis-a-vis equity shares; (b) the participation in surplus fund; (c) the participation in surplus assets and profits, on winding-up which may remain after the entire capital has been repaid; (d) the payment of dividend on cumulative or non-cumulative basis. (e) the conversion of preference shares into equity shares. (f) the voting rights; (g) the redemption of preference shares; |
Section 14, 55 & 114 (2) of Companies Act 2013.
Rule 9(2) Share Capital and Debentures) Rules, 2014 |
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| 7) | Filling of minutes of general meeting with the ROC | MGT-14 form should be filed with the Registrar of Companies within 30 days of passing the special resolution altering AOA along with given documents: –
A printed copy of the Altered Article of Associations board resolution. |
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Within 30 days of passing such resolution. |
| 8) | Circulation of private placement cum application offer letter | A private placement offer cum application letter shall be in the form of an application in Form PAS-4 serially numbered and addressed specifically to the person to whom the offer is made and shall be sent to him, either in writing or in electronic mode; | Section 42 (3) Companies Act, 2013 and Rule 14 (3) Companies (Prospectus and Allotment of Securities) Rules, 2014 | Within thirty days of recording the name of the PROI. |
| 9) | Application for subscribing |
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| 10) | Maintenance of the offers. | The company shall maintain a complete record of offers made to the PROI in Form PAS-5 | Rule 9 B and 14 (4) Companies (Prospectus and Allotment of Securities) Rules, 2014 | |
| 11) | Board Meeting for Allotment of CCPS | The Board shall approve the following :
The Board meeting shall require the following compliance: 1. Sending notice of the meeting specifying the date, time venue of the meeting along with the agenda of the meeting along not less than seven days before the date of such meeting. 2. The meeting of the Board of the directors should be held with compliance to the provisions of the Companies Act, 2013 and Secretarial Standards -1 (SS-1). 3. The Quorum of the board meeting shall be 1/3 of the total strength of the Board or two directors whichever is higher. |
Board Meeting:
Section 173&174 and Secretarial Standards -1 (SS-1). CCPS
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Within sixty days of receiving the allotment money. |
| 12) | Filling of the Private placement with the ROC | -Return of allotment in Form PAS-3 shall be filed with the Registrar of Companies along with the fees as provided in the Companies (Registration Offices and Fees) Rules, 2014 along with a complete list of all the allottees containing—
– the full name, address, Permanent Account Number and E-mail ID of such security holder; – the class of security held; – the date of allotment of security; -the number of securities held, nominal value and amount paid on such securities; -The Company cannot utilize the funds raised until they have complied with this step. |
Section 42 Companies Act, 2013 and Rule 14 (6) Companies (Prospectus and Allotment of Securities) Rules, 2014 | Within 15 days of Allotment.
The whole process of allotment should be completed withing 12 months of passing the special resolution |
| 13) | Form Foreign Currency-Gross Provisional Return (FC-GPR): | Company shall fill the form FC-GPR as per its obligations under FEMA for issuing equity instruments (CCPS) to a person resident outside India which shall be treated as FDI. | Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 | Not later than thirty days from the date of issue of CCPS. |
| 14) | Maintenance of Register of Preference Shares | The Company shall maintain and enter the details of the PROI who has been allotted the preference shares. | Section 88, Companies Act 2013 and Rule 9 Companies (Shares and Debentures) Rule, 2014 | |
| 15) | Annual Return on Foreign Liabilities and Assets (FLA) | Since the company shall receive investment by way of capital contribution, they shall submit form FLA to the Reserve Bank of India. | Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 | On or before the 15th day of July of each year. |
Conclusion
In conclusion, the issuance of Compulsorily Convertible Preference Shares (CCPS) must be conducted in strict compliance with the applicable laws, regulations, and guidelines under the Companies Act, 2013, the Securities and Exchange Board of India (SEBI), and the Foreign Exchange Management Act (FEMA). Additionally, the company must ensure adherence to any specific guidelines issued by the Reserve Bank of India (RBI) and other relevant regulatory bodies concerning Persons Resident Outside India (PROI). To navigate the complexities of regulatory compliance and mitigate legal risks, it is essential that the company seeks adequate legal advice throughout the process.
[1] Rule 2(k) defines equity instruments to include preference shares. Explanation to Rule 2(k) states that “Preference shares” means fully and mandatorily convertible preference shares which are fully paid i.e., CCPS.
[2] Rule 2(r), FEM (Non-Debt) Rules defines FDI or Foreign Direct Investment as an investment by a person resident outside India in an unlisted Indian company;
[3] Rule 9 B Companies (Prospectus and Allotment of Securities) Rules, 2014 states that any private company issuing securities after 31st March 2023 shall issue shares only in dematerialised form as per the Rules of Depositories Act, 1996
[5] Rule 6(a), FEM (Non-Debt) Rules an entity of a country, which shares land border with India or the beneficial owner of an investment into India who is situated in or is a citizen of any such country, shall invest only with the Government approval.
[6] Rule 21(2)(b), FEM (Non-Debt) Rules
[7] Rule 22(1) FEM (Non-Debt) Rules
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