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Miscellaneous Provisions |
BUY-BACK OF SHARES AND OTHER SPECIFIED SECURITIES
As an alternative mode of buy-back but without requiring approval of the Court/NCLT, a company can carry out buy-back of shares and other specified securities (section 77A and related provisions). The conditions and requirements for carrying out buy-back of securities are as follows:
The buy-back has to be out of free reserves/securities premium account or out of proceeds of issue of shares or other specified securities other than the type of the same kind of securities.
Further, the company cannot make issue of the same type of securities as bought back within six months of buy-back.
Where the buy-back is from free reserves/securities premium account, the Company is required to transfer to Capital Redemption Reserve an amount equal to the face value of the shares bought back.
The Articles of Association of the company should authorise the buy-back in.
The company should pass a special resolution for authority for buy-back except in following cases;
Where buy-back is for 10% or less than of the total paid-up equity capital and free reserves, the buy-back can be authorized by the Board without approval by special resolution. In such case, further, there should be gap of 365 days between two such buy-backs; and
The authority by way of special of Board resolution will be valid for twelve months.
The buy-back should be up to 25% of the total paid-up capital and free reserves and in any case the buy-back of equity shares should not exceed 25% of the paid-up equity share capital in a financial year.
The debt equity ratio post buy-back should not exceed 2:1. For this purpose, the term "debt" includes all secured as well as unsecured debt.
Buy-back can be only of fully paid-up securities.
Listed companies have to comply additionally with SEBI Regulations for buy-back and unlisted companies have to follow Guidelines prescribed by the Central Government.
The buy-back can be on proportionate basis or of odd lots or through open market or of ESOPs.
The company will have to file a solvency certificate in Form 4A to be signed by at least two Directors including the Managing Director.
Shares bought back have to be extinguished/physically destroyed within seven days.
Further issue of same kind of securities cannot be made by the company for a period of six months except as bonus shares or sweat equity shares or discharge of subsisting obligations like on conversion or stock option.
Buy-back cannot be done —
Through any subsidiary company
Through any investment company or group of investment companies.
Where a company has defaulted in repaying deposits or interest thereon or in paying dividends or in redeeming debentures or preference shares or in repaying any term loans (or interest thereon) from banks/financial institutions.
In case a company that has not complied with section 159, 207 or 211.
There are detailed provisions for disclosures in the notice of general meeting, filing of "post buy-back" reports, maintenance of registers, etc.
Forms:
Form 4A – Form of Declaration of Solvency
Form 4B – Form of Register of Buy-back
Form 4C – Form of Return to be filed with ROC/SEBI within 30 days of buy-back
Penal provisions in case of default – Two years’ imprisonment or a fine of Rs. 50,000/- or both to every person connected with the default.
COMPANY DEPOSITS
Companies are restricted from accepting "deposits". The restrictions for non-banking financial companies (NBFCs) are notified by the Reserve Bank of India and for other companies (non-NBFCs) mainly by the Central Government.
The term "deposits" is defined very widely and except for specified exclusions, all monies received by a Company would be deposits.
From the term — ‘Deposits’, following are excluded namely amounts received from/by way of :
Government Local authority, foreign government or any other foreign person or citizen or authority or any amount guaranteed by Government.
Banks
Various government or semi-government financial companies or Corporation/insurance companies or a public financial institution as
Any other company
Security deposit from an employee
Security or advance from any purchasing, selling or other agents in the course of business or any advance received against orders for supply of goods, properties or services.
Subscription to any share, stock, bonds or debentures pending allotment. Any amount received by way of calls in advance so long as this is not repayable under the Articles.’
Amounts in trust or in transit
Deposits from shareholders, directors or relatives in case of private company.
Directors or members out of his/their own funds, by the company. Such director/member has to furnish a declaration in writing to the effect that the funds are not being given out of funds acquired by him by borrowing or accepting from others.
Issue of bonds or debentures secured by the mortgage of any immovable property or convertible into shares, subject to certain conditions.
Unsecured loans promoters pursuant to an agreement with financial institutions for loans, as long as the loan from such financial institutions are outstanding.
The relevant provisions of sections 58A, 58AA, 58AAA and 58B contain relevant general provisions for protection of depositors, disclosures, etc., mainly for non-fiancial companies.
Restrictions on Acceptance of Deposits:
Private companies cannot, vide their articles, accept deposits except from members, directors or their relatives.
Companies having a Net Owned Funds (as defined) of less than Rs. 1 crore cannot invite deposits.
A company which is in default in repayment of any deposit or part thereof and any interest thereon (applicable w.e.f March 1, 1997).
Acceptance of deposits in violation of section 58A can result in hefty fine for the company concerned and imprisonment up to 5 years and fine for the officers in default.
Penal interest @ 18% for overdue period in respect of deposits matured and claimed but remaining unpaid.
Return of deposits to be filed with the ROC with a copy to RBI on or before 30th June every year in the prescribed form.
Exemption to SSIs :- Vide Notification 2-2-1996 issued by Dept. of Company Affairs SSIs are granted exemption from the provisions of section 58A and rules made thereunder provided : (i) they are registered as SSIs with the Directorate of SSI; (ii) investment in plant and machinery does not exceed Rs. 300 lakhs; (iii) deposits are accepted from not more than 100 persons; (iv) total deposits accepted do not exceed Rs. 20 lakhs or the paid-up capital of the company, whichever is less.
SPECIAL PROVISIONS IN RELATION TO DEPOSITS BY SMALL DEPOSITORS (SECTION 58AA)
Small depositors are persons who have deposited in a year amounts not exceeding Rs. 20,000 as deposits with a company.
Companies, including NBFCs are required to report on monthly basis of the default in repayment of deposits of small depositors. The Tribunal may take suo motu action against such defaulting companies and pass orders in this regard.
Companies that make default to small depositors in respect of their deposits cannot accept further deposits from small depositors.
Depositors can make nomination in the manner provided in sections 109A/B in respect of their deposits.
Companies that default in repaying deposits suffer several disabilities such as prohibition in making inter-corporate loans and investments, buy-back of shares,
Companies (Acceptance of Deposits) Rules, 1975 – important features
Several sources and types of deposits excluded from definition and hence not covered by these rules. Important of such exclusions are:-
Deposits from government, local authority and from foreign government or authority, and foreign citizens and persons.
Deposits from specified banks and financial institutions.
Deposits from other companies.
Security deposits from employees.
Deposits from Directors for the Company.
Deposits from its shareholders or directors or relatives of directors.
Deposits against security of specified types.
All inclusive brokerage between 1 and 2% depending upon term of deposits can be paid.
Limits of acceptance of deposit:
as % of paid-up capital and free
reserves* as per latest audited
balance Sheet(1) Short-term deposit for a period of 3 or more months 10 (2) Deposit from shareholders in case of public company or deposits guaranteed by Directors or deposits against unsecured debentures 10 (3) Public deposits
25
* Free reserves do not include – reserve created for payment of future liability for depreciation or for bad debts or created by revaluation of assets.
Limits on deposits as a percentage of "net worth" as defined:—
a) Deposits against unsecured debentures or from shareholders or deposits guaranteed by directors – 10%
b) Other deposits – 25%.
The term of deposits, generally, cannot be less than six months and more than thirty-six months. Short-term deposits payable not earlier than three months can however be accepted to the extent of 10% of "net worth".
Companies accepting deposits need to maintain unencumbered "liquid assets" in specified type of securities/ accounts to the extent of 15% of deposits that would mature in that financial year. To be used only for repaying such deposits but even after such use, such liquid assets shall not fall below 10% of the remaining maturing deposits during that financial year.
Advertisement containing prescribed disclosures has to be made for invitation of deposit. Where deposits are accepted without invitation, a statement in lieu of advertisement has to be filed.
If deposits and mature and are claimed but not paid, a penal interest of 18% would be charged for the period of delay. For delay to small deposits, the penal interest is 20%.
Annual returns with certificate from auditors in prescribed forms has to be filed with the Registrar of Companies by 30th June of each year with a copy sent to the Reserve Bank of India.
DIRECTIONS OF THE RESERVE BANK OF INDIA TO NON-BANKING FINANCIAL COMPANIES
Non-banking financial companies RBI Directions – Important provisions
NBFC DIRECTIONS, 1998
Directions as notified by the RBI and applicable to NBFCs:
NBFCs Acceptance of Public Deposits (Reserve Bank) Directions, 1998 [AOPDRBD][Notified on
31-1-1998]
Non–Banking Financial Companies (Deposit Accepting or Holding) Prudential Norms (Reserve Bank) Directions, 2007 [PN(D)RBD] [Notified on 22-2-2007]; and Non–Banking Financial Companies (Non-Deposit Accepting or Holding) Prudential Norms (Reserve Bank) Directions, 2007 [PN(ND)RBD] [Notified on 22-2-2007];
Non-banking Financial Companies Auditor’s Report (Reserve Bank) Directions, 1998 [ARRBD] [Notified on 2-1-1998]
The principal on which Directions are issued is that they are aimed at deposit accepting NBFCs and are applicable in a restrictive manner (with a lot of compliance requirements) to NBFCs accepting/holding deposits, and in a limited manner (with least compliance requirements to NBFCs not accepting deposits.
Classification as an NBFC
The Reserve Bank of India has clarified that for a company to be classified as an NBFC, to decide on its principal business, it will have to satisfy the two tests of assets and income. The financial assets should be more than 50% of the total assets (netted off by intangible assets) and the income from financial assets should be more than 50% of the gross income. Both these tests need to be satisfied for a company to be regarded as an NBFC.
Registration Requirement
An NBFC cannot commence/carry on its business without—
(a) Obtaining the certificate of registration from the Reserve Bank of India; and
(b) Having NOF of Rs. 25 lakhs (Rs. 200 lakhs for companies applying for registration after 21-4-1999)
Definition of "Public Deposits"
The definition of "Public Deposits" has been amended by the AOPDRBD to provide for exclusion therefrom of the following items:
Inter-corporate deposits;
Deposits from shareholders of a private Co. and from Directors of a limited Co. or from relative of Director of the NBFC.
Amount received on issue of Optionally Convertible Debentures;
Amount received from promoters based on Financial Institution stipulations.
The above four categories of deposits remain restrictive deposits, and are hence, exempt.
Net Owned Fund (NOF) is defined in S. 45-1A of the Reserve Bank of India Act, 1934 and includes
paid-up equity capital,
free reserves, and
paid-up preference share capital that is compulsorily convertible into equity.
From these items, one has to reduce,
accumulated balance of loss;
deferred revenue expenditure;
intangible assets; and
Excess of 10% of paid-up capital and "free reserves" over;
investment in shares of subsidiaries / group companies / other NBFCs; and
investment in debentures / bonds/ loans and advances (including HP / Lease Finance) made to subsidiaries / group Cos.
Deposit Acceptance Ceiling and Credit Rating
Deposit acceptance is now related to Credit Rating and compliance of all the Prudential Norms contained in the PNRBD.
NBFC with NOF less than Rs. 1 crore cannot accept deposits.
Entitlement to hold / accept public deposits w.e.f. 18-12-1998 as under:
NOF
(Lakhs)Equipment Leasing Company (ELC)/ Hire Purchase Finance Company (HPFC) Loan Company (LC)/ Investment Company (IC) <25 NIL
NIL >25 1.5 times subject to Rs. 10 crores NIL >25 with MIG Rating if CRAR* 15% 4 times s.t. CRAR* of
10% (on 31-3-1998) & 12% (on 31-3-1999) *= CRAR is Capital to
Risk Asset Ratio1.5 times subject to CRAR* of 15%
Liquidity Norms
9.1 NBFCs accepting / holding public deposits are required to invest in unencumbered approved securities as a percentage of deposits accepted u/s 45 IB of the RBI Act, 1934 ranging from a percentage of 5% and 25% (as may be notified from time to time by the RBI) of the deposits outstanding at the close of the business of the business of last day of the 2nd preceding quarter. A Quarterly Return is required to be submitted by an NBFC within 15 days of the month succeeding the quarter to which it relates. The liquidity requirement limits are as under:
Type of NBFCs To invest in unencumbered Approved securities (a) ELC / HPFC 15% of deposits (pursuant to AOPDRBD) (b) Registered IC/LC - do - (c) Other NBFCs 15% of deposits (pursuant to AOPDRBD)
Non-compliance with the liquidity requirements is liable to penal interest on the shortfall @ 3% above the Bank Rate for delay of one quarter and delay beyond that @ 5% above Bank Rate.
The ceiling of rate of interest is specified at 12.50% per annum w.e.f. 24th April 2007
A NBFC shall have its accounting year as the financial year ending on 31st March every year.
Returns to be filed by NBFC to RBI:
Annual Return of Deposits in the prescribed form within 6 months of the financial year.
Half yearly return on prudential norms in Form NBS2 within 3 months of the end of half year.
Quarterly Return in form NBS-5 Monetary an Supervisory Return by all NBFCs holding public deposits of Rs.20 crores and above.
Note : NBFCs not holding / accepting public deposits are not required to file returns at (b) and (c) above.
Ceiling on payment of brokerage: Brokerage / commission/ incentive/ any other benefits by whatever name called up not to exceed 2% of the deposits collected. In additions, reimbursement of expenditure can be made up to 0.5% of the deposits collected.
The maturity period for public deposits is minimum 12 months and maximum 60 months.
Premature encashment of deposits within 3 months is not permitted. However, interest rate on premature encashment are;
Period Held
Rate 3-6 months
No interest 6-12 months Up to 10% p.a. 12 months up-to-date of maturity
1% less than contract rate
The auditors are required to report upon 17 matters notified by the RBI Directives, in case of accounts finalized of the NBFC and in case of any qualified/adverse/unfavourable reporting, the Report is also to be sent, by the auditors, to the concerned Regional Office of the Department of Non-banking Supervision, RBI where the registered office of the NBFC is situated. Contravention of RBI Act/Directions is also required to be forming part of statutory audit report to shareholders u/s 227(2) of the Companies Act,1956.
The Auditor of NBFC has to verify on a continuous basis compliance of capital adequacy ratio requirement.
A Schedule as per format prescribed in the notification No. DIVBS 167/GGM (OPA)-2003 dt. 29-3-2003 should be given.
MERGERS, AMALGAMATION AND ACQUISITIONS
The term "mergers" and "amalgamation" are practically synonymous while acquisitions usually refer to acquisition of undertakings though all these three terms are often used interchangeably in common parlance. For this material, however, mergers/amalgamation will refer to amalgamation of companies carried out pursuant to section 394 of the Companies Act, 1956 while acquisition will refer to acquisition of undertakings. Note that a typical restructuring transaction such as amalgamation or acquisition has many implications apart from the requirements of the Companies Act, 1956 but some of such implications are also referred to herein.
MERGERS/AMALGAMATIONS
Depending upon the type of companies, their assets and individual features, the issue and procedures involved will be different. Some of the important steps and issues that one needs to keep in mind before and while carrying out the amalgamation are as follows.
BUSINESS AND STRATEGIC ISSUES
Need and rationale for merger and preparation of cost-benefit ratio including financials.
Carefully evaluating implications of amalgamation under various laws including income-tax, stamp duty, etc.
Carefully evaluating the need, time frame and costs for various activities and approvals.
Deciding on date from which amalgamation is to take effect.
Due diligence of transferor company.
Valuation and exchange ratio.
INDICATIVE CHECKLIST OF SOME IMPORTANT PROCEDURES AND APPROVALS
Preparation of Scheme and other documents.
Check power in Memorandum of both companies for amalgamation and, if not, incorporate such powers. Check also whether transferee company has powers to carry on business of transferor company.
Approval at Board Meetings including related matters.
To intimate the Stock Exchanges where the companies are listed and also to obtain approvals and generally carry out other compliances under the Listing Agreement.
Filing of petitions with Court (based on the location of the registered office of the company, there may be application in different courts or a common high court).
Getting audit done by auditor appointed by Official Liquidator.
Meeting objections, if any, by Regional Director.
Calling and holding of general meetings of shareholders and creditors, as ordered by court.
Issue of advertisements relating to the amalgamations.
Filing of report by Chairman of individual meetings.
Obtaining sanction of Court for the amalgamation.
Payment of stamp duty, as applicable.
Carry out post-merger formalities including filing of order of amalgamation within 30 days with Registrar of Companies, transfer of employees, etc..
Issue of shares and/or other consideration to the shareholders of the transferor company.
Proper accounting of the amalgamation as per Accounting Standard 14 and generally disclosure in Board’s report regarding the amalgamation.
ACQUISITIONS
Acquisitions in business and substantive terms is similar to an amalgamation except for legal implications and procedures. Hence, refer to points under "Business and Strategic Issues" for amalgamations also. In particular, a study of the undertaking and surrounding facts should reveal special features and issues that would need consideration and compliance.
INDICATIVE CHECKLIST OF SOME IMPORTANT PROCEDURES AND APPROVALS
Check power in memorandum of association to carry out acquisitions and to carry on business of seller Company.
Valuation of the undertaking.
Board approval for the acquirer company.
Board and shareholder approval for the transferor company.
Documentation for the transfer.
Consideration and payment of applicable stamp duty.
Payment of consideration and formalities therefore, depending upon the type of consideration.
Post acquisition issues including accounting, disclosure, transfer of employees, etc.
DEMERGERS
Demerger is when a company hives of or separates one or more industrial undertaking into another company or to an existing company. the company to which the industrial undertaking is transferred is the Resulting company and the company which transfers the industrial undertaking would be the Demerged Company.
Indicative checklist of some important procedures and approvals
Check power in Memorandum of Association to demerge or sell or transfer the assets and liabilities of the company.
Valuation of the undertaking.
Board approval for the demerger.
Obtain necessary consents/approvals, if any prior to the demerger.
Prepare Scheme of Arrangement.
Apply to the Court/NCLT in prescribed forms. (Refer Form Nos. 33-40).
Shareholder’s approval at the general meeting concerned for the purpose.
File the approval of the court with the ROC within 30 days.
Documentation for the transfer.
Allot the securities in the resulting company to the shareholders of the transferor or demerged company.
SLUMP SALE
Slump sale means the transfer of one or more undertakings as a result of a sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sale.
Indicative checklist of some important procedures and approvals
Check power in Memorandum of Association to sell or transfer the assets and liabilities of the company.
Valuation of the business to be sold on slump sale basis.
Board approval for the slump sale and the consideration thereof. Intimate concerned stock exchanges.
Ascertain tax liability under Income tax/sales tax etc..
Prepare Slump Sale Agreement.
Obtain Shareholders’ approval as special resolution if the same is by postal ballot, comply rules thereof. File the special resolution with the ROC.
Execute the Agreement.
INTER-CORPORATE LOANS AND INVESTMENTS (SECTION 372A)
The provisions of the Companies Act, 1956 would need consideration when a Company makes a loan to or invests in another body corporate. The provisions of section 372A are considered here.
The section applies to the following type of transactions (by say, Company A) :—
Loan by Company A to any other body corporate. "Loans" include inter-corporate deposits and debentures.
Giving by Company A of guarantee of provision of security in connection with a loan made by:—
(i) Any other person to any other body corporate of
(ii) To any other person by any other body corporate.
Acquisition by Company A, by way of subscription, purchase or otherwise the securities of any other body corporate. "Securities" for this purpose would be as defined under section 2(h) of the Securities Contracts (Regulation) Act.
The section applies to public companies only and thus not to private companies. The section also does not apply loans, etc. made by the following companies:—
Banking, insurance or housing companies, in the ordinary course of their business;
Companies established with the object of financing industrial enterprises or of providing infrastructural facilities.
Company whose principal business is the acquisition of shares, stock, debentures or other securities.
The section also does not apply to the following transactions:—
Investment in shares allotted pursuant to section 81(1)(a).
Loans by holding companies to its wholly owned subsidiary. Guarantees/securities by holding companies for loans to its wholly owned subsidiary. Investments in securities by Holding Company of its wholly owned subsidiary.
A company make loans, etc. up to the higher of the following:—
60% of its paid-up share capital and free reserves.
100% of its free reserves.
"free reserves" for this purpose means reserves free for distribution as dividends and share premium but excluding shares application money.
For loans, etc. beyond this limit, the company would need approval by way of special resolution where the prescribed disclosures should be made in respect of the proposed loan, etc.
For any loans, etc., approval shall be taken of the company at a Board meeting with the consent of all the directors present at the meeting and also the prior approval of the public financial institution whose term loan to the company is subsisting. However, where the loan, etc. is not beyond 60% of the company’s paid-up share capital and free reserves and there is no default in repayment loan or payment of interest, the prior approval of the public financial institution would not be required.
Loans shall not be made at lower than the prevailing bank rate, as defined.
Companies that have subsisting defaults of section 58A cannot make loans, etc.
The company should maintain a register of loans, etc. with prescribed details.
For contravention of provisions of this section (other than the requirements relating to maintenance of register), imprisonment or fine is provided for. However, such term of imprisonment/ amount of fine would be reduced to the extent to which the loan, investment, etc. is recovered.