10October

Where the Rules effectively nullify the intent of the Act – Sec 62 of the Companies Act 2013 & the Rules

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Companies Act 2013 (CA 2013) is structured in manner whereby all Rights & Preferential Issues for raising Share Capital are covered by Section 62 and Private Placements have to follow the process laid down u/s 42. The distinction between a Private Placement and a Preferential Issue is clear wherein a “private placement” has been defined as under:

“Private Placement means any offer of securities or invitation to subscribe securities to a selected group of persons by a company (other than by way of public offer) through issue of a private placement offer letter and which satisfies the conditions specified in this section.”

The intent of the legislature was to bring in stricter norms to cover the misuse, as in the case of Sahara, where the Group effectively structured a Public Issue by its two private companies, under the garb of private placement, issued optionally fully-convertible debentures (“OFCDs”) amounting to about Rs 24,000 crores to more than 2 crore investors.

One can understand the intent and sympathise with it as the system was beaten by Sahara and its lawyers by a devious method which was later struck down by the Supreme Court. However, we are sure, that it was never the intent of the Legislature of bring all Preferential issues, not amounting to a private placement, under the strict provisions of Section 42. But this is what the Rules have effectively done – specifically Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014 which mandates that issue of shares on a Preferential basis u/s 62(1)(c) should also comply with conditions laid down in section 42 of the Act.

This has thrown up a peculiar problem for startups where the initial paid up Share Capital is say Rs 1,00,000/- which is subscribed for and paid by the Founders and now a Venture Capital/ Angel Investor comes in and agrees to value the Company at say Rs 2 crore for taking a stake of 10%. The said transaction/ investment is typically structured as a) issue of Equity Shares at a Premium, which in this case would be Equity Shares of Rs 10,000 issued at a Premium of Rs 19,90,000/- totalling Rs 20,00,000/- OR b) issue of Rs 10,000 Equity Shares at a lower Premium of Say Rs 90,000/- along with .001% CCPS for Rs 19,00,000/- at Par.

Now the question is whether this satisfies the provisions of Sec 62(1)(c ) read with Rule 14(2)(c ) that requires 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”

An interpretation given by one of the top Law firms doing Due Diligence was that both the structuring options discussed above violated the Rule and as such attract penal provisions as the Equity Shares being allotted at face value are less than Rs 20,000/-. In their opinion the violation attracted penalty u/s 42 and not Sec 62, but that’s another story!!

In our opinion there is no violation of Sec 42 read with Rule 14 as the “investment size” in the second case is more than Rs 20,000/- of face value of the “securities”, the thrust being on “investment size” and “securities” which would logically include the Equity Shares and CCPS.

PS: the penalty, if any, would be leviable u/s 62 and not 42 as the offer and allotment was being made u/s 62 – the triggering of the conditions u/s 42 was incidental.

10October

Proviso to Sec 196 puts unnecessary fetters, needs reconsideration

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Section 196 of Companies Act 2013 for Appointment of Managing director, Whole-time Director or Manager applies to all companies including Private Ltd companies. It has a proviso that says that “no re-appointment shall be made earlier than one year before the expiry of his term”. Didn’t get the rationale for the same, what does this achieve? Unnecessarily complicates matters for Pvt Ltd closely held companies which want to reappoint a person mid-term – just happened in one of our cases where a new investor came in, the terms of the Founder MD were renegotiated, and as per the terms of the SHA the MD was to be appointed for another 5 years at a particular remuneration but couldn’t as he was already the MD of the company and more than one year was pending in the existing term. The terms of the SHA which were in violation of Section 196 also couldn’t be incorporated in the Articles (as required by the SHA) as that would amount to the Articles too not being in sync with the Act.

This needs serious reconsideration as India seems to be on the move with huge interest and investment activity in Start-ups and the rights of the Founders and the Investors unnecessarily get muddled through such fetters.

In the earlier 1956 Act Section 317 had a period of 2 years within which the reappointment could be made, the same is now reduced to 1 yr. In any case the said section did not apply to Pvt Ltd companies but Section 196 does.

10October

Shared services space all set to take off

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Interesting times what with We Work also coming to India, they are having a Q&A at the India Start Up tomorrow, this sector is about to take off.

“With the proliferation of solo entrepreneurs and start-ups in the country, it was a matter of time before office space became another opportunity to launch a start-up, catering to the mobile workplace needs of these professionals.

There are others in this place but the Amit Ramani-led Awfis Solutions intends to be a clutter-breaker,… with a managed aggregation strategy. Instead of focusing on the peer-to-peer model, the company intends to create a niche through this strategy in the form of ‘pro working’ spaces.

The company, with initial funding of $10 million (Rs 67 crore), currently has a network of 1,500 seats in Mumbai, Bengaluru and Delhi. It aims to take this to 10,000 seats across 10 cities. Ramani and Radha Kapoor are the key investors in the venture; the proportion of investment by either is not disclosed.”

Ref: http://www.business-standard.com/article/companies/awfis-taps-into-mobile-workspace-needs-of-entrepreneurs-and-start-ups-116011400765_1.html

10October

Prior approval of RBI required for acquisition/ transfer of control of NBFCs

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RBI has mandated prior approval of RBI in cases of acquisition/ transfer of control of Non-Banking Financial Companies (NBFCs) whether by acquisition of shares or through a change in management.  The directions contained are applicable with immediate effect, i.e., the same will apply on any takeover or acquisition of control, any change in the shareholding or any change in the management occurring after the date of this circular.

Any violation of the aforementioned directions would result in adverse regulatory action including cancellation of CoR.

Link to the Notification: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=9934&Mode=0

10October

How technology is changing the game at the compliance end, the lower end of the Tax food chain.

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The speed at which fin tech firms, such as ClearTax, are gaining traction with users is amazing, it goes to clearly show that Indians are increasingly adopting technological solutions for solving their problems. With this, I guess, the people doing these lower end jobs, across service sectors, need to start worrying and re-skilling as they might just be out of jobs very soon.

“ClearTax, a start-up that helps individuals and businesses file their tax returns online, has raised $12 million in a funding round led by SAIF Partners, the firm said on Friday.

The firm, run by Defmacro Software Pvt. Ltd, in May raised $2 million from venture capital firm Sequoia Capital India, and Paypal co-founder Peter Thiel’s Founders Fund Angel, a seed stage venture firm. ClearTax is Founders Fund’s first investment in India.

The firm, which in 2015 saw a million users use its online portal, is eyeing close to three million users in 2016. ClearTax has partnered with 1,000 chartered accountants, helping them file tax returns, across the country.

The firm gets 60% of its business from offering its services to institutions and the rest comes from directly transacting with consumers. It did not disclose its annual turnover. It works with over 300 small and medium businesses and 11 banks.”

News Source: Mint

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