Newsletter | August 2017
NOTIFICATIONS/CIRCULARS
Ministry of Corporate Affairs (MCA)

Monthly Summary: July

Clarification regarding applicability of exemption given to certain private companies under section 143(3)(i) of the Companies Act 2013.

MCA vide order dated 25th July 2017 has issued clarification regarding applicability of exemption to certain private companies under Section 143(3)(i) of the Companies Act 2013. The exemption shall be applicable for those audit reports in respect of financial statements pertaining to financial commencing on or after 1st April 2016, which are made on or after the date of the said notification. Circular

Companies (Meetings of Board and its Powers) Second Amendment Rules 2017

MCA Vide order dated 13th July 2017 has issued following rules further to amend the Companies (Meetings of Board and its Powers) Rules,2014, namely :-
(1) These rules may be called the Companies (Meetings of Board and its Powers) Second Amendment Rules, 2017.
(2) They shall come into force on the date of their publication in the Official Gazette.
(3) In sub-rule (3), for clause (e), the following shall be substituted, namely:-
“Any director who intends to participate in the meeting through electronic mode may intimate about such participation at the beginning of the calendar year and such declaration shall be valid for one year:
Provided that such declaration shall not debar him from participation in the meeting in person in which case he shall intimate the company sufficiently in advance of his intention to participate in person.”

(ii) In sub-rule (11), in clause (a), after the words "decision taken by majority”, the words "and the draft minutes so recorded shall be preserved by the company till the confirmation of the draft minutes in accordance with sub-rule (12)" shall be inserted.

In the principal rules, for rule 6, the following rule shall be substituted, namely:-

Committees of the Board: The Board of directors of every listed company and a company covered under rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 shall constitute an 'Audit Committee' and a Nomination and Remuneration Committee of the Board.” Circular
 
Reserve Bank of India (RBI)

Master Direction - Lending to Micro, Small & Medium Enterprises (MSME) Sector

RBI Vide its circular dated July 24th 2017 has issued directions w.r.t lending to Micro, Small & Medium Enterprises sector. These Directions shall be called the Reserve Bank of India [Lending to Micro, Small & Medium Enterprises (MSME) Sector] Directions, 2017 and shall apply to every Scheduled Commercial Bank {excluding Regional Rural Banks (RRBs)} licensed to operate in India by the Reserve Bank of India. The direction contains clarifications on the meaning of following terms:

  • Micro, Small and Medium Enterprises
  • Manufacturing and Service Enterprises
  • Priority Sector
  • Adjusted Net Bank Credit (ANBC)

Clarification on targets / sub-targets for lending to Micro, Small and Medium Enterprises (MSME) sector by Domestic Commercial Banks and Foreign Banks operating in India, Common guidelines / instructions for lending to MSME sector, Institutional arrangements and Committees on flow of Credit to MSE sector. Circular

Investment in plant and machinery for the purpose of classification as Micro, Small and Medium Enterprises – documents to be relied upon

RBI vide its circular dated July 13th 2017 has issued clarifications on ascertaining the investment in plant and machinery for classification of an enterprises as Micro, Small and Medium, the following documents could be relied upon:
(i) A copy of the invoice of the purchase of plant and machinery; or
(ii) Gross block for investment in plant and machinery as shown in the audited accounts; or
(iii) A certificate issued by a Chartered Accountant regarding purchase price of plant and machinery. Circular

Audit Committee of the Board of Directors – Nomination of Non-Executive Chairman

RBI vide its circular dated July 13th 2017 has issued direction on the nomination of Non – Executive Chairman.  In view of the bifurcation of the post of Chairman and Managing Director of Public Sector Banks (PSBs) by Government of India into a non-executive Chairman to give an overall policy direction to the bank and a full time executive Managing Director and Chief Executive Officer (MD&CEO) to oversee the day to day functioning of the bank (GOI notification dated April 24, 2015), it is clarified that in banks where the Board of Directors is chaired by a non-executive Chairman, there will not be any restriction if he/she is also nominated to the Audit Committee of the Board of Directors. Circular
 
Securities and Exchange Board of India (SEBI)

Online Filing System for Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs)

SEBI vide its circular dated July 24th 2017 has introduced an online system  for  filings  related  to REITs and InvITs.The  online  system  can  be  used  for application for registration, reporting and filing under the   provision of aforesaid Regulations. The new system would help REITs and InvITs to complete registration and other regulatory filings with Sebi much faster and in a cost-effective manner. The online system, which can be used for application for registration, reporting and filing under the provision of REITs and InvITs regulations, has been made operational. Circular

Investments by FPIs in Corporate Debt

SEBI vide its circular dated July 20th 2017 has stated in reference  to  the  SEBI  circular SEBI/HO/IMD/FPIC/CIR/P/2016/67dated  August  04, 2016 whereby the  Corporate  debt  limit of INR  244,323  cr for  FPIs was redefined  as  the Combined  Corporate Debt Limit (CCDL) for  all  foreign  investments  in  Rupee  denominated bonds issued both onshore and overseas by Indian corporates. The  CCDL  shall be  available on tap for investment  by  foreign  investors  till  the overall investment reaches  95%,  after  which,  the auction mechanism shall be initiated for allocation of the remaining limits. In the event  the  overall  FPI  investment in  CCDL exceeds  95%  (as  indicated  by  the  debt utilisation  status  updated  daily  on  the  websites of  NSDL  and  CDSL),  the  following  procedure shall be followed:

  • The depositories (NSDL and CDSL) shall direct the custodians to halt all FPI purchases in corporate debt securities.
  • The depositories shall then inform the exchanges (NSE   and   BSE) regarding   the unutilised debt limits for conduct of auction.
  • The  auction shall be  held  only  if  the  free  limit  is  greater  than  or  equal  to  INR  100  cr. However, if the free limit remains less than 100 cr for 15 consecutive trading days, then an auction shall be conducted on the sixteenth trading day to allocate the free limits.
  • Once the limits have been auctioned, the FPIs will have a utilisation period of 10tradingdays within which they have to make the investments.
  • A single FPI/ FPI Group cannot bid for more than 10% of the limits being auctioned.

The subsequent auction would be held 12 trading days after the previous auction, subject to the fulfilment of the condition mentioned at Point (3c) of the circular. As  Rupee  denominated  bonds  issued  by  Indian  corporates  overseas  are  covered  under CCDL, issuance of such bonds overseas shall temporarily cease, until the limit utilisation falls back to below 92%. The auction  mechanism  shall  be  discontinued  and  the  limits  shall  be  once  again  available  for investment  on  tap  when  the  debt  limit  utilisation  falls  below 92%. Circular

Amendment to Investor Grievance Redressal System and Arbitration Mechanism

SEBI vide its circular dated July 11th 2017 has issued amendments to investor grievance redressal system and arbitration mechanism. The amendment aims to further enhance the effectiveness of grievance redressal mechanism at Market Infrastructure Institutions (MIIs). The SEBI has undertaken the following to ensure effective grievance redressal mechanism:

The arbitration mechanism has been made more effective by making public dissemination of arbitrator’s profile to ensure transparency, submission of the documents in soft copies in order to assist the arbitrator in pronouncing comprehensive and speedy awards, ensuring performance review and training of the arbitrators, creating a common database of defaulting clients to ensure effective implementation of the arbitral award, empanelling of the arbitrator/ appellate arbitrators with at least one (1) member of the panel as a retired judge, revising the fees of the arbitrator, empanelling the IGRP (Investor Grievance Resolution Panel) members with no arbitrator/ appellate arbitrator as IGRP member, ensuring that the place of arbitration/appellate arbitration (in the event the amount is more than INR 50.00 lakhs) to be the nearest metro city, ensuring that the rate of interest on the award passed by the arbitrator to be in accordance with the Arbitration and Conciliation (Amendment) Act, 2015, and setting up of a effective filing fees structure to ensure speedy grievance redressal system.

The SEBI has ensured effective utilization of the IPF and ISF Fund through IPF Trust and Investor Service Committee respectively. Further, the SEBI shall be periodically reviewing the sources of fund in order to make suitable recommendations for enhancement of such funds, and has modified the guidelines for utilization of the IPF, ISF and interests of such funds. The SEBI have made further provisions including admissibility of claims for payment out of these funds, determination of legitimate claims from IPF, and threshold limit for interim relief paid out of IPF. The SEBI also revised the composition and functions to be handled by Disciplinary Action Committee, Defaulter’s Committee, the Investor Services Committee, and the IPF Trust to ensure effective management of the disputes. Circular

Guidelines for issuance of ODIs, with derivative as underlying, by the ODI issuing FPIs

SEBI vide its circular dated July 7th 2017 have issued guidelines on issuance of ODIs with derivative as underlying, by the ODI issuing FPIs. The  ODI  issuing FPIs  shall  not  be  allowed  to  issue  ODIs  with  derivative  as  underlying, with the exception of those derivative positions that are taken by the ODI issuing FPI for hedging the equity shares held by it, on a one to one basis. In such cases, where the underlying derivatives position are not for purpose of hedging the equity shares, the issuing FPI (Foreign Portfolio Investor) has to liquidate such ODIs latest by the date of maturity or by December 31, 2020, whichever is earlier. Sebi also advised ODI-issuing FPIs to liquidate such ODI instruments prior to the timeline. In the case of issuance of fresh ODIs with derivatives as underlying, a certificate has to be issued by the compliance officer (or equivalent) of the ODI-issuing FPI. It should also be certified that the derivatives position, on which the ODI is being issued, is only for hedging the equity shares held by it, on a one-to-one basis. Circular

Online Filing System for Foreign Venture Capital Investors

SEBI vide its circular dated July 6th 2017, SEBI has introduced  an  online  system  for  filings  related  to  Foreign  Venture  Capital Investors(FVCI).The online system can be used for application for registration, reporting and filing under the provisions of FVCI Regulations. All applicants desirous of seeking registration as a FVCI are now required to submit their applications online only, through SEBI Intermediary Portal at https://siportal.sebi.gov.in. Furthermore, all SEBI  registered FVCIs are now required to file their compliance reports and submit  applications  for  any  request under  the  provisions  of  FVCI  Regulations,  through  the  online  system  only. The aforesaid online filing system for FVCI has been made operational from July 1, 2017.
Circular

Investments by FPIs in Government Securities

SEBI vide its circular dated July 4th 2017 has decided to revise the limit for investment by FPIs in Government Securities, for the July –September 2017 quarter to Rs 1.85 lakh crore. Limit for Long Term FPIs (Sovereign  Wealth  Funds  (SWFs),  Multilateral  Agencies, Endowment  Funds,  Insurance  Funds,  Pension  Funds  and  Foreign  Central  Banks)in Central Government securities shall be revised to INR 54,300 cr. The debt limit category of State Development Loans (SDL) shall have two sub-categories, namely, SDL-General and SDL-Long Term. SDL-General shall be available for investment on tap for all categories of FPIs while SDL-Long Term shall be available for investment on tap for only Long Term FPIs. The limit for investment by all FPIs in SDL-General shall be INR 28,500 cr while that for SDL-Long Term shall be INR 4,600 cr. Circular
 
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Previous Issues:
July 2017
June-I 2017
June-II 2017
May 2017
April Part I 2017
April Part II 2017
March 2017
December 2016
November 2016
October 2016
September 2016
August 2016
April 2016
March 2016
February 2016

‘Preferential allotment’ in restructuring schemes

K A Najmi and Y Sriniwas Arun

The restructuring of stressed assets under the Strategic Debt Restructuring Scheme (SDR), the Scheme for Sustainable Structuring of Stressed Assets (S4A) or any other deep restructuring under the extant guidelines of the Reserve Bank of India (RBI) seeks to achieve timely resolution of stressed assets.

The purpose of the restructuring is to enable the borrowing company to address intermittent cash stress and meet the repayment obligations of its debts by converting the unsustainable portion of debt into equity or an equity-like instrument, thus substantially reducing the debt repayment and servicing obligation of the company for a considerable time.

A comparison between the allotment of securities by further issue in the normal course and allotments pursuant to the restructuring schemes reveals substantial differences in the processes.

In the case of further issue in the normal course, the Companies Act, 2013, and the rules made under it set out a significant and proactive role for the board of directors in driving the process of further issue of capital by private placement/preferential allotment.

As against this, S4A involves identification or acknowledgement of a stress situation (either current or potential), building consensus on the need for restructuring, subjecting the company to a techno economic viability study by an independent agency, drafting a resolution plan (based on the study) by the majority of the lenders and submitting it to the overseeing committee. The committee reviews the plan and examines whether it is in conformity with the S4A guidelines. If the plan is found to be in order, it becomes binding on the lenders. It is then communicated to the borrower, which is expected to carry out all corporate compliances and allot the securities as per the resolution plan.

A doubt has been raised in some quarters as to whether the issue of securities pursuant to restructuring schemes is in compliance with the Companies Act and rules framed under it in relation to preferential allotment on a private placement basis. Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014, lays down that the issue of shares on a preferential basis should comply with section 42, which in turn stipulates issuance of a “private placement offer letter” by the company. Under S4A the need to make preferential allotment on a private placement basis emanates from approval of the resolution plan by the lenders and is not a normal business need or outcome.

The resolution plan, on being approved, is communicated to the company and triggers further action on the part of the company to achieve the following: (i) approval of implementation of the resolution plan by the shareholders and the board of directors; (ii) issuance of securities pursuant to section 62 and other applicable provisions of the Companies Act pertaining to allotment of securities; and (iii) amendment of the articles of association, if required.

The restructuring schemes have been formulated to address larger interests and are vital for managing the non-performing assets of banks. Hence, the schemes call for a holistic approach from a compliance perspective in accord with the underlying spirit and intent of the legislative prescriptions.

Section 62(3) of the Companies Act allows conversion of debt into equity. However, difficulty is encountered in cases where the conversion option is not available to the lender under the loan agreement and/or a special resolution under section 62(3) was not passed. It is desirable that sub-section (3) of section 62 be suitably amended or that the applicability of sub-sections (4), (5) and (6) of section 62 be extended for the securities issued pursuant to the restructuring schemes.

Another area of concern in the formulation of the resolution plan under S4A has been the pricing of listed shares for conversion purposes where such shares are traded at a price which is far from being representative of their real value as arrived at on the basis of the techno economic viability report prepared by an independent agency.

Where, despite the high price at which the company’s shares are being traded, the borrower is in financial distress and approaches its lenders for restructuring of debt, S4A becomes difficult to apply. This is because, under the regulations of the Securities and Exchange Board of India, the debt is to be converted into equity at a price at which the shares are being traded in the market. Hence, in such situations, allowing conversion at a fair value on a case-to-case basis could go a long way in resolving the pricing issue and thus achieving the objective of the restructuring schemes.

Recent Amendments

Recent amendment to Legal Metrology (Packaged Commodity) Rules, 2011.

1. The Legal Metrology (Packaged Commodities) Rules (“Rules”), 2011 regulates pre-packaged commodities and provides, among other things, certain mandatory declarations to be made on the package or on the label affixed on the package.

2. Recently, the Ministry of Consumer Affairs, Foods and Public Administration (“Ministry”) has notified Legal Metrology (Packaged Commodities) Amendment Rules, 2017 (“Amendment Rules”). The Amendment Rules are aimed at enhancing customer protection, while also balancing the requirement of ease of doing business. The Amendments Rules shall come into force with effect from January 1, 2018.

3. The substantial changes that have been made to the Rules by the Amendment Rules are summarized below:

a) The definition of ‘institutional consumer’ under Rule 2 has been amended to prevent commercial transactions by such institutions. Accordingly, ‘institutional consumer’ means the institution which buys packaged commodities bearing a declaration ‘not for retail sale’, directly from the manufacturer or from an importer or from wholesale dealer for use by that institution and not for commercial or trade purposes.

b) In respect of packages containing food articles, the declaration of name and address of manufacturer, packer and /or importer as provided in Rule 6 (1) (a) of the Rules shall not be applicable and such declarations are required to be made as per requirements specified in Food Safety and Standards Act, 2006. Prior to the Amendment Rules, the entire Rule 6 (1) was not applicable to packages containing food articles, and all the declarations were required to be made as per Food Safety and Standards Act, 2006.

c) In case of imported products, name of the country of origin or manufacture or assembly should be mentioned on the package.

d) Declarations such as ‘best before or use by date, month and year’ should be mentioned on the packages containing items that can become unfit for consumption after the expiry of the stated time. The terms “best before” and “use by date” have been defined. However, if any other law has provisions in respect of “best before” / “use by date”, the provisions of the Rules in this regard shall not apply.

e) Placing barcodes, e-codes and authorized logos of Government schemes, such as Swatch Bharat Mission on the packages has been made discretionary. However, e-code for net quantity assurance of the commodity and other required declarations may be made only after obtaining the same in the manner as specified by the Central Government.

f) E-commerce entities or in case of market-place model of e-commerce, the manufacturers or the sellers are required to display all the mandatory declarations specified in the Rules, except for month and year in which the commodity is manufactured or packed, on the digital and electronic networks used for e-commerce transactions.

g) The specifications of height and width of declaration made on the package has been increased, particularly for packages with principal display panel of 50 to 500 square centimeters. Further, the manner of determining the area of principal display panel has also been provided in Rule 7.

h) Specific mention has been made in the Rules that no person shall declare different MRPs (dual MRPs) on identical pre-packaged commodity unless permitted under any law. This will have a huge impact on the consumers, manufacturers and retailers as no person can overcharge for identical products.

i) The manner of carrying out test of quantity and error and manner of deciding the samples for the purposes of conducting inspection has been made more scientific.

j) Definition of the terms consumer, e-commerce, e-commerce entity and marketplace based model of e-commerce has been inserted in the Rules.

k) Penalty for contravention of provisions where specific penalty is not provided has been enhanced from INR 2,000 to INR 5,000.

4. In addition to the above, the Ministry has, vide notice dated July 4, 2017 (“Notice”), provided certain clarifications in respect of unsold stock of pre-packaged commodities, subsequent to the introduction of Goods and Services Tax with effect from July 1, 2017. As per the Notice:

a) Manufacturers, packers or importers of pre-packed commodities are permitted to declare the changed retail sale price (MRP) due to imposition of GST (“Changed Price”), on unsold stock manufactured/packaged/imported prior to July 1, 2017, only till September 30, 2017.

b) The Changed Price may be mentioned by way of stamping, sticker or printing.

c) The Changed Price shall not be more than the increase in GST or any fresh tax made applicable on the product.

d) The Changed Price shall not overwrite the original price already printed on the package.

e) Notice of Changed Price must be advertised in newspapers, circulated to dealers and to the Director / Controller of Legal Metrology.

f) Any packaging material or wrapper which could not be exhausted by the manufacturer/packer/importer prior to July 1, 2017, may be used for packaging of material up to September 30, 2017 or till such date the packaging material or wrapper is exhausted, whichever is earlier, after mentioning the Changed Price and adhering to the abovementioned conditions.

5. As mentioned above, the primary objective of the Amendment Rules is to bring more transparency and accountability. Further, the Notice, with the objective of keeping in pace with the tax reforms, provides transition provisions. It is important for companies dealing with pre-packaged commodities meant for retail consumption in India to review their labels and make necessary changes to ensure that they are not violating the applicable laws, as amended from time to time.

 

 
 
 

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