Rights Issue by Pvt Ltd Co in Companies Act 2013- Detailed procedure

Rights Issue by Pvt Ltd Co in Companies Act 2013- Detailed procedure

Mrs. Jayalakshmi Srinivasan, Company Secretary, Chennai

Let us look at Sec. 62 which deals with Rights Issue.

Check if the issue is authorized by its articles of association; If not necessary amendment needs to be made.




62. (1)Letter of offer to be sent to person who are shareholders at the date of offer. The offer should be in proportion, as nearly as circumstances admit, to the paid-up share capital on those shares by sending a letter of offer subject to the following conditions,namely:—

(i) the offer shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days and not exceeding thirty days from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined;

(ii) unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any other person; and the notice referred to in clause (i) shall contain a statement of this right;

(iii) after the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered, the Board of Directors may dispose of them in such manner which is not dis-advantageous to the shareholders and the company;

(2) The notice referred to in sub-clause (i) of clause (a) of sub-section (1) shall be despatched through registered post or speed post or through electronic mode to all the existing shareholders at least three days before the opening of the issue.

4) A return of allotment of securities under section 42 shall be filed with the Registrar within thirty days of allotment in Form PAS-3 and with the fee as provided in the Companies (Registration Offices and Fees) Rules, 2014 along with a complete list of all security holders containing-

(i) the full name, address, Permanent Account Number and E-mail ID of such security holder;

(ii) the class of security held;

(iii) the date of allotment of security ;

(iv) the number of securities held, nominal value and amount paid on such securities; and particulars of consideration received if the securities were issued for consideration other than cash.

In my view there is no stipulation of the following and hence Nothing given below will apply:

The requirement of valuation of shares and letter of offer being in the form prescribed- PAS 4 is not applicable. Valuation report would perhaps be required Only in so far as this would be required to comply with FEMA for equity infusion from abroad.

No requirement to ensure the securities allotted by way of rights offer shall be made fully paid up at the time of their allotment and the payment to be made for subscription to securities shall be made from the bank account of the person subscribing to such securities and the company shall keep the record of the Bank account from where such payments for subscriptions have been received:

No time limit prescribed for making allotment of securities under rights issue Only as per RBI regulations there is a requirement to allot within 180 days of receipt of money.

Nothing mentioned about keeping the monies received on application under rights issue in a separate bank account in a scheduled bank and shall not be utilised for any purpose other than—

(a) for adjustment against allotment of securities; or

(b) for the repayment of monies where the company is unable to allot securities.

No restriction on utilisation of Money before allotment.

Though the offer would be made in name and company shall keep records of such offers and all offers covered under this section shall be made only to such persons whose names are recorded by the company prior to the invitation to subscribe, and that such persons shall receive the offer by name, and that a complete record of such offers shall be kept by the company there is No requirement of filing the complete information about such offer with the Registrar within a period of thirty days of circulation of offer letter.

No stipulation on monies being payable towards subscription of securities only through cheque or demand draft or other banking channels but not by cash.

So it appears that if a Pvt Company wants to make allotment to one shareholder then it is possible for it to make a rights offer and get the shares renounced by the other shareholders without going through the complications of the private placement In other words If there are three shareholders two can renounce the shares to one and the allotment can be made to only one shareholder and the rigours of pvt placement need be gone through.

Solicit the views of co professionals on the same.

Top 10 Action Items for Listed Companies post Cos Act 2013

SEBI has recently amended the listing Agreement, to be in line with some of the provisions of the new Act.

In this article, we have compiled the important changes applicable from the attached circular and the Action points for  most of the listed Companies. The current circular also talks about many points which are already there in the current Clause 49 and hence not touched upon in this article. 

Please note that most of these changes shall be given effect before 1^st October, 2014.

1. E Voting facility to Shareholders in General Meeting

Company shall provide e-voting facility to its shareholders for all shareholders' resolutions, to be passed at General Meetings or through postal ballot. Such e-voting facility shall be kept open for such number of days as the relevant Rules prescribe.

Action point : Listed Companies need to include E Voting from the current AGM.

2. Whistle Blower Mechanism to be implemented

The company should devise a Whistle Blower Mechanism enabling stakeholders, including individual employees to freely communicate their concerns about illegal or unethical practices.

Action point : Listed Companies need to devise & introduce a Whistle Blower policy before 1^st October, 2014

3. Mandatory appointment of Women Director

Company shall have one women Director. (She may or may not be Independent Director).

Action point : Listed Companies need to have a Women Director in the Board before 1^st October, 2014

4. An independent Director can hold office for a maximum of 10 years

An independent director shall hold office for a term up to five consecutive years on the Board of a company and shall be eligible for reappointment for another term of up to five consecutive years. A person who has already served as an independent director for five years or more in a company as on October 1, 2014 shall be eligible for appointment, on completion of his present term, for one more term of up to five years only.

A person shall not serve as an independent director in more than seven listed companies.

Action point : The ensuing AGM Notice shall specify that the Independent Directors are appointed for 5 years term. 

5. Formal issue of appointment letter to Independent Directors & Performance evaluation

The company shall issue a formal letter of appointment to the  independent directors in the manner as provided in the Companies Act, 2013. The letter of appointment along with the detailed profile of independent director shall be disclosed on the websites of the company and the Stock Exchanges not later than one working day from the date of such appointment.

The Nomination Committee shall lay down the evaluation criteria for performance evaluation of independent directors. The company shall disclose the criteria for performance evaluation, as laid down by the Nomination Committee, in its Annual Report. The performance evaluation of independent directors shall be done by the entire Board of Directors (excluding the director being evaluated).

Action point : Company need to issue formal letter of appointment to Independent Directors. It shall be placed in website.

6. Separate meeting of Independent Directors made Compulsory

The independent directors of the company shall hold at least one meeting in a year, without the attendance of non-independent directors and members of management. All the independent directors of the company shall strive to be present at such meeting.

Action point  : Company shall conduct one separate meeting of Independent Directors in a year.

7. Vacancy in office of Independent Directors - to be filled in 3 months or next Board meeting

An independent director who resigns or is removed from the Board of the Company shall be replaced by a new independent director at the earliest but not later than the immediate next Board meeting or three months from the date of such vacancy, whichever is later.

Action point : No immediate action is required. But going forward, any vacancy in the office of Independent Director shall be filled within 3 months or next Board meeting whichever is later.

8. Remuneration Committee to have 3 Non executive Directors

The company shall set up a nomination and remuneration committee which shall comprise at least three directors, all of whom shall be non-executive directors and at least half shall be independent. Chairman of the committee shall be an independent director.

9. Related party transactions – Shareholders approval required…

The company shall formulate a policy on materiality of related party transactions and also on dealing with Related Party Transactions.

Provided that a transaction with a related party shall be considered material if the transaction / transactions to be entered into individually or taken together with previous transactions during a financial year, exceeds five percent of the annual turnover or twenty percent of the net worth of the company as per the last audited financial statements of the company, whichever is higher.

All Related Party Transactions shall require prior approval of the Audit Committee.

All material Related Party Transactions shall require approval of the shareholders through special resolution and the related parties shall abstain from voting on such resolutions.

Existing Related party transactions which are likely to continue beyond 31 March 2015 shall be placed for approval in the first General Meeting subsequent to October 01, 2014. However, a company may choose to get such contracts approved by the shareholders even before October 01, 2014.

Action point : CS need to check if the current Related party transactions with subsidiaries will fall under this criteria; if so, need to place before Shareholders.

10. Constitution of Risk management committee for Top 100 Companies

The company shall constitute a Risk Management Committee. The Board shall define the roles and responsibilities of the Risk Management Committee and may delegate monitoring and reviewing of the risk management plan to the committee 

Action point: This is currently applicable for Top 100 Companies only.

Mandatory appointment of Company Secretaries: Is it required?

Mandatory appointment of Company Secretaries: Is it required?

After April 1^st 2014, one of the burning issues is the new Rule about KMP. As you may be aware, the new Rule makes KMP mandatory only for Public Companies with a Paid up capital of Rs. 10 crores or more only.  

There have been debates whether the appointment of Company Secretary should be mandated in certain type of Companies… also some section of the people are of the view and deliberations as to why a legislation should give employment opportunity to a professional.

Let me share some thoughts in favour as to why a Company Secretary is mandatorily required in certain Companies.

 

Ensuring Compliance

i)                    Company Secretary is the Compliance officer and he has been shouldered with the responsibility for compliance of various legislations that are made applicable to a Company.  In reality it is an undisputed fact that the Directors at the end of the day are entrepreneurs and their heart and soul is merged in sync with acquisition of new business and delivering the projects successfully. In other words, they are forced to worry about Topline and bottom line (Sales and Profit).  So in every Company there must be someone who is responsible for taking care of the compliance requirement and CS is the person who is recognized by profession and he has been successful to shoulder this responsibility for the last few decades and there is no reason as to why this needs to be reversed now

ii)                  Companies Act 2013 does not distinguish to a great extent between a Public Limited and Private Company; most of the provisions which are applicable to Public Company have been made applicable to Private Limited Company as well. Therefore the compliance requirement which needs to be adhered by a Private Limited Company has increased now; however it is a paradox that the KMP Rules exempts Private Limited Company from appointing KMP, more particularly a CS.

iii)                In general many Companies do not embrace compliance with warmth. Factually speaking, it is mostly given the last priority in the business, particularly in the Companies managed by individuals. (In case of Multi nationals they give more importance to compliance either by virtue of statue or practice).

iv)                The penalties that have been levied for non compliance in the Companies Act are quite steep. The cost that the Company is required to pay a Company Secretary to ensure the compliance is met is very negligible when compared to the penalty which may be awarded to the Company for a single offence in case of its non compliance. Hence it is imperative for the Companies to have a CS in its rolls to take care of Compliance not as a situation based activity but on day to day basis.

Indian scenario:

It is the general notion/mentality of an individual that as long as something is made mandatorily required by law only then it needs to be followed. Or else as long as it is optional then less attention or no attention needs to be adhered to it.

For instance, when you travel in road and where there is a traffic signal the action which we take when a police constable is present or absent varies hugely. When the police constable is present then the vehicles stop when the signal is red in his absence most of them pay no heed to the colour of the signal and continue their journey. In other words it is the mentality of the people to break the law when no one is looking or monitoring.

The role that a CS plays is similar to that of a traffic police and it is he who manages and balances between Directors, Government agencies, shareholders and other stakeholders.

He is entrusted with managing compliance inside the Company, who advises management about the applicability of various provisions on day today basis.

If compliance is made optional, not many may go for it. When Compliance is made mandatory, the appointment of a Company Secretary who is the Compliance Officer is also important.

Promises made...

ICSI is an Institute formed by the Government. It has conducted various career awareness programs in thousands of colleges and schools and has informed the Students that this is a course which provides excellent job opportunities and that every Company with Rs. 5 Crore capitals is required to appoint a Company Secretary and that this profession is one which has a bright future keeping in mind the growing Compliance requirement. Considering the promises and assurances made at the various programs, more than 4 lakh students have joined this course; now if Government shirks itself of the responsibility with which it had given life to a new profession so as to have made Company Secretary the guardian of law the object, aim and action plan and most importantly the future of its own child is at stake..

Future of CS Members & Students                                  

There is a feeling among many of the members that some of the provisions will be restored and our council members will ensure that the practice areas will not be affected. Also a section of the members are worried that practicing CS will take care of their interest and KMP provision may be left as it is.  

It is humbly stated that if KMP provision is not restored, many members will be forced to come out of employment and they will be coming to Practice only. If the practice area is so flooded, then the question of charging lesser amount, undercutting and other related issues will crop up.

So in the interest of the profession, it is not only the areas for practice must be improved, but that of employment also must be taken care.

CS Members across India are completely shocked and upset over the new Act; Members are now calm since it is election time in India and it may be difficult to make any changes now; however if the necessary changes are not done in the next few weeks or a month, the emotions and anguish of CS members will certainly be made explicit to the all concerned..

Preferential Issue of Shares by a Pvt Co- Detailed procedure

Preferential Issue of Shares by  a Pvt Co- Detailed procedure

Mrs. Jayalakshmi Srinivasan, Company Secretary, Chennai

Formalities to be complied by a Private Company wishing to issue shares on preferential basis to any person whether or not an employee or shareholder for cash or otherwise than on cash : 

Applicable sections 

Sec 62(c),42 & 

Companies (Share Capital and Debentures) Rules, 2014.

Applicability: To All Companies

Points to take care off:

a)    Check if the issue is authorized by its articles of association;

b)    Valuation report of the valuer subject to such conditions as may be prescribed

c)     Ensure the securities allotted by way of preferential offer shall be made fully paid up at the time of their allotment.

d)    A Special resolution is to be passed : The company shall make the following disclosures in the explanatory statement to be annexed to the notice of the general meeting pursuant to section 102 of the Act:

(i) the objects of the issue;

(ii) the total number of shares or other securities to be issued;

(iii) the price or price band at/within which the allotment is proposed;

(iv) basis on which the price has been arrived at along with report of the registered valuer;

(v) relevant date with reference to which the price has been arrived at;

(vi) the class or classes of persons to whom the allotment is proposed to be made;

(vii) intention of promoters, directors or key managerial personnel to subscribe to the offer;

(viii) the proposed time within which the allotment shall be completed;

(ix) the names of the proposed allottees and the percentage of post preferential offer capital that may be held by them;

(x) the change in control, if any, in the company that would occur consequent to the preferential offer;

(xi) 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;

(xii) the justification for the allotment proposed to be made for consideration other than cash together with valuation report of the registered valuer.

(xiii) The pre issue and post issue shareholding pattern of the company in the following format-

Sr. No.	Category	Pre Issue		Post Issue
		No of shares held	% of shareholding	No of shares held	% of shareholding
A	Promoters holding
1	Indian
	Individual
	Bodies Corporate
	Sub Total
2	Foreign Promoters
	Sub total(A)
B	Non promoters holding
1.	Institutional Investors
2.	Non-Institution :
	Private Corporate Bodies
	Directors and Relatives
	Indian Public
	Others(including NRIs)
	Sub total(B)
	Grand total

e)   Company shall make an offer in Form PAS 4.  A private placement offer letter shall be accompanied by an application form 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, within thirty days of recording the names of such persons in accordance with sub-section (7) of section 42:

f)    No person other than the person so addressed in the application form shall be allowed to apply through such application form and any application not conforming to this condition shall be treated as invalid. 

g)   no fresh offer or invitation of another kind of security shall be made unless allotments with respect to offer or invitation made earlier in respect of any other kind of security is completed  or that offer or invitation has been withdrawn or abandoned by the company.

h)   the value of such offer or invitation per person shall be with an investment size of not less than twenty thousand rupees of face value of the securities;    This will apply to non banking finance companies registered with RBI only if RBI has not prescribed similar rules(if RBI has prescribed rule the same will apply) This will not apply to housing finance companies registered with the National Housing Bank under National Housing Bank Act, 1987, if they are complying with regulations made by National Housing Bank in respect of offer or invitation to be issued on private placement basis

i)   the payment to be made for subscription to securities shall be made from the bank account of the person subscribing to such securities and the company shall keep the record of the Bank account from where such payments for subscriptions have been received:

j)   The company shall maintain a complete record of private placement offers in Form PAS-5. A copy of such record along with the private placement offer letter in Form PAS-4 shall be filed with the Registrar with fee as provided in Companies (Registration Offices and Fees) Rules, 2014

k)   the date of private placement offer letter shall be deemed to be the date of circulation of private placement offer letter.

l)  A return of allotment of securities under section 42 shall be filed with the Registrar within thirty days of allotment in Form PAS-3 and with the fee as provided in the Companies (Registration Offices and Fees) Rules, 2014 along with a complete list of all security holders containing-

(i) the full name, address, Permanent Account Number and E-mail ID of such security holder;

(ii) the class of security held;

(iii) the date of allotment of security ;

(iv) the number of securities held, nominal value and amount paid on such securities; and particulars of consideration received if the securities were issued for consideration other than cash.

As per section 42 the Company making an offer or invitation shall allot its securities within sixty days from the date of receipt of the application money for such securities and if the company is not able to allot the securities within that period, it shall repay the application money to the subscribers within fifteen days from the date of completion of sixty days and if the company fails to repay the application money within the aforesaid period, it shall be liable to repay that money with interest at the rate of twelve per cent. per annum from the expiry of the sixtieth day:

Company shall keep monies received on application under this section shall be kept in a separate bank account in a scheduled bank and shall not be utilised for any purpose other than—

(a) for adjustment against allotment of securities; or

(b) for the repayment of monies where the company is unable to allot securities.

Money can be used only after allotment.

The offer should be made in name and company shall keep records of such offers. All offers covered under this section shall be made only to such persons whose names are recorded by the company prior to the invitation to subscribe, and that such persons shall receive the offer by name, and that a complete record of such offers shall be kept by the company in such manner as may be prescribed and complete information about such offer shall be filed with the Registrar within a period of thirty days of circulation of  relevant private placement offer letter.

Letter of offer is to be sent to all shareholders specifying the number of shares and the time line within which the same is to be accepted.The time frame of not less than 15 days and not exceeding 60 days does not appear to be applicable.

The offer shall not be made to more than 200 persons [excluding qualified institutional buyers  as defined in SEB(Issue of Capital and Disclosure Requirments) Regulations, 2009 as amended from time to time )and employees of the company being offered securities under a scheme of employees stock option as per provisions of clause (b) of sub-section (1) of section 62], in a financial year and on such conditions (including the form and manner of private placement) as may be prescribed.This limit of 200 persons will apply to non banking finance companies registered with RBI only if RBI has not prescribed similar rules(if RBI has prescribed rule the same will apply) This will not apply to housing finance companies registered with the National Housing Bank under National Housing Bank Act, 1987, if they are complying with regulations made by National Housing Bank in respect of offer or invitation to be issued on private placement basis

 Any offer or invitation not in compliance with the provisions of the Act and rules  shall be treated as a public offer and all provisions of this Act, and the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992 shall be required to be complied with. This is irrespective of the money having been received or not

All monies payable towards subscription of securities under this section shall be

paid through cheque or demand draft or other banking channels but not by cash.

No company offering securities under this section shall release any public

advertisements or utilise any media, marketing or distribution channels or agents to inform the public at large about such an offer.

If a company makes an offer or accepts monies in contravention of this section,the company, its promoters and directors shall be liable for a penalty which may extend to the amount involved in the offer or invitation or two crore rupees, whichever is higher, and the company shall also refund all monies to subscribers within a period of thirty days of the order imposing the penalty.

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Note: The Second part of this series (Rights Issue by Pvt Companies) will be published soon...