Amendment in SEBI (Prohibition of Insider Trading) Regulations, 2015

SEBI vide its notification dated July 25, 2019 has amended the SEBI (Prohibition of Insider Trading) Regulations, 2015. These changes are effective from July 25, 2019.

The key highlights of the amendment are as follows:

1.      The trading window restrictions shall not apply in respect of following transactions:

                                  i.         in respect of a pledge of shares for a bonafide purpose such as raising of funds, subject to pre-clearance by the compliance officer and compliance with the respective regulations made by the Board;

                                ii.                   off-market inter-se transfer of shares between insiders who were in possession of same UPSI without being in breach of Regulation 3 (communication or procurement of UPSI) and both parties made a conscious and informed trade decision;

                              iii.       transaction is carried out through block deal mechanism between persons who were in possession of same UPSI without being in breach of Regulation 3 and both parties made a conscious and informed trade decision;

                              iv.          transaction was carried out pursuant to a statutory or regulatory obligation to carry out a bonafide transaction;\

                                v.     transaction in question was undertaken pursuant to exercise of stock options in respect of which exercise price was pre-determined in compliance with applicable regulations;

                                   vi.       trades executed pursuant to trading plan;  
  

                            vii.          transactions which are undertaken in accordance with respective regulations made by the Board such as acquisition by conversion of warrants or debentures, subscribing to rights issue, further public issue, preferential allotment or tendering of shares in a buyback offer, open offer, delisting offer.

2.      Material Financial Relationship – Annual income of Designated Person (Schedule B Point 14 and Schedule C Point 12): For the purpose of determining Material Financial Relationship (“MFR”) now annual income of only designated persons is to be considered. Also with this amendment now only those transactions will be covered under MFR where the ‘designated person’ is giver and transaction is equivalent to 25% of annual income of designated person. Earlier, it covered receipt of financial help by designated person as well.

The difficulty in ascertaining the payer’s income (third party) on the basis of which MFR was decided is done away with this amendment.

3.      Disclosure by Designated Person:  The detail of educational institutions where the designated person has graduated is required to be given instead of studied.  

The above referred amendment is applicable to listed companies, intermediaries and fiduciaries.

4.      Closure of trading window: (Schedule B Point 4): The Listed Company is required to close trading window from the end of every quarter till 48 hours after the declaration of financial results.

Due dates and Actionable under SBO Framework

This concept of “Significant Beneficial Owner” (“SBO”) was introduced under Companies Act, 2013 under Section 90 vide an amendment last year with effect from 13th June 2018 and the Companies (Significant Beneficial Ownership) Rules, 2018 (“SBO Rules”) thereunder were issued.

MCA had amended the SBO Rules vide a Notification dated 8th February 2019 wherein the detailed framework and actionable on the part of SBO was given as follows:-

Responsibility	Actionable	Rule	Due Date
Significant Beneficial Owner (Individual SBO)	To file Declaration in Form BEN -1 (physical form) with Company, as on date of commencement of Amended SBO Rules (position as on 8th February 2019)	Rule 3(1)	Within 90 days from 8th February 2019, i.e., on or before 9th May 2019
	To file Declaration in Form BEN -1 with Company, whenever there is any change in significant beneficial interest	Rule 3(2)	Within 30 days from the change
	Note – for changes in significant beneficial interest during the period between 8th February 2019 to 9th May 2019 – additional timeline provided	Explanation to Rule 3(2)	Within 30 days after 9th May 2019, i.e., on or before 8th June 2019
Reporting Company	Filing of BEN 1 received from SBO with MCA in BEN-2 (e-form)	Rule 4	Within 30 days from receipt of BEN 1 from SBO Due date Extended to 30th September 2019
	Note – Due date for filing BEN 2 with MCA for declaration in BEN 1 received from SBO for declaring the position as on 8th February 2019 has been extended to 30th September 2019
	Maintaining Register of Significant Beneficial Owners as per format given in Form BEN 3	Rule 5	At all times, and shall be open for inspection during business hours by any member of Company
	Giving of notice to members (other than individuals) who hold not less than 10% of shares or voting rights or right to receive or participate in the dividend or any other distribution payable in a financial year – in Form BEN 4 [for seeking declaration from SBO]	Rule 6	No timeline prescribed, but within reasonable timeframe after due date of receipt of BEN 1, i.e., after 9th May 2019

It must be noted that though the due date for filing BEN 2 has been extended to 30th September 2019, there was no extension in timeline for giving initial BEN 1 by the SBOs (which was till 9th May 2019) and BEN 1 for any change till 9th May 2019 (which was till 8th June 2019). Hence, the obligation on Companies to maintain Register in SBO 3 format has already begun and any member can demand inspection of the same…..

Date of newsletter:- 30th July 2019

Highlights of Companies Amendment Bill, 2019

The Companies (Amendment) Bill, 2019 is introduced in Lok Sabha to give the effect to the Companies (Amendment) Second Ordinance, 2019. Along with the ordinance, the bill has few additional amendments. The additional amendments in the bill were made available for public comments by Ministry of Corporate Affairs in November 2018. Important additional amendments over and above the Companies (Amendment) Second Ordinance, 2019 are as follows: 

1. Amendment to Section 90 - Register of significant beneficial owners in a company: Although onus of making declaration of Significant Beneficial Interest is on individual who holds Significant Beneficial owner, Sub- Section 4A is inserted in Section 90 which compels the Company to take necessary steps to identify Significant Beneficial Owner in relation to company. Further, the penalty for non-compliance of same are also provided

2. Amendment to Section 135 – Corporate Social Responsibility

                               I.            For the purpose of calculating CSR expenditure, a newly incorporated company that has not completed 3 years from the date of its incorporation is required to calculate  its average net profit for the years so completed

                            II.            Where a Company fails to spend on CSR, the bill proposes to create following   two situations

§  Situation 1 – The Company has  ongoing project

§  Situation 2 -  The Company doesn’t have  ongoing project

Situation- 1	Situation - 2
§  The the amount which is unspent should be transferred  to Special Account in a scheduled bank – within 30 days from the end of the Financial year; and §  The amount transferred is required to be spent within 3 Financial years from the date of such transfer §  On failure to comply -Transfer to fund specified in Schedule VII – within 30 days from the date of completion of 3rd Financial year	§  The amount which is unspent should be transferred to a Fund specified in Schedule VII, within a period of six months of the end of the financial year

                         III.       The penalty on failure to comply point II:

Company- Fine – Min – Rs. 50, 000 Maximum – Rs. 25,00,000

Officer in default – Imprisonment – upto 3 yrs OR

Fine - Minimum – Rs. 50,000 Maximum – Rs. 500,000 OR Both

3. Amendment to section 26, 29, 35 and 398: The Bill proposes that copy of the prospectus shall be filed with the Registrar instead of delivery for registration.

4. Enhanced Powers of Serious Fraud Investigation Office (SFIO): The Bill also seeks to provide that where an investigation report submitted by SFIO states that a fraud has taken place and any director, KMP or officer has taken undue advantage or benefit, then the Central Government may file an application before Tribunal with regard to disgorgement and such director, KMP or officer may be held personally liable without any limitation of liability.

Standardizing reporting of violations related to code of conduct under SEBI (Prohibition of Insider Trading) Regulations 2015

(1) Applicability: This circular is applicable to every listed company, intermediary and fiduciary who are required to formulate code of conduct.

(2) Background for the circular

a.      Regulation 9(1) and 9(2) of SEBI (Prohibition of Insider Trading) Regulations 2015 (“PIT Regulations”) requires Board of Directors of every listed company and the Board of directors or heads of the organization of every intermediary and fiduciary are required to formulate a code of conduct for designated person and their immediate relatives

b.      It is also their responsibility to monitor its compliance and promptly inform SEBI about any violations of code of conduct  in accordance with Clause 13 of Schedule  B (in case of listed company) or clause 11 of schedule C (in case of intermediary or fiduciary) 

(3) Why this circular on standardized reporting of violations:

In this regard SEBI has been receiving references from listed companies regarding violations of code of conduct under PIT Regulations. Many of such references provide incomplete or inadequate details about the nature of violation, designation and functional role of designated persons who have committed the violation, frequency of such violations in the past, the actions taken and reasons thereof etc. Such information is crucial for taking further actions. 

With an objective to standardize the process relating to dealing with such violations of the code of conduct, all listed companies, intermediaries and fiduciaries shall:

a. report such violations by the designated persons and immediate relatives of designated persons in the standardized format to SEBI as given in this circular.

b. Maintain a database of the violation of code of conduct by designated persons and immediate relatives of designated persons that would entail initiation of appropriate action against them.

This circular is applicable from July 19, 2019.     

Link of SEBI Circular is as follows:

https://www.sebi.gov.in/legal/circulars/jul-2019/standardizing-reporting-of-violations-related-to-code-of-conduct-under-sebi-prohibition-of-insider-trading-regulations-2015_43618.html   

Format for compliance report on Corporate Governance to be submitted to Stock Exchange (s) by Listed Entities

Background for circular dt: July 16, 2019

(1) Regulation 27(2) of SEBI(Listing Obligations and Disclosure Requirements) Regulations, 2015 (“Listing Regulations”) specifies that a listed entity shall submit a quarterly compliance report on corporate governance in the format specified by SEBI form time to time. This report has to be submitted to recognized stock exchange within 15 days from end of quarter.

(2) SEBI vide its earlier circular dt: September 24, 2015 had specified the format for same. All listed companies are currently complying with this circular and submitting the compliance report within 15 days of end of every quarter.  

Why this circular:

(1)   The committee on Corporate Governance under Chairmanship of Shri Uday Kotak made several recommendations for improving corporate governance. Most amendments necessary to implement these recommendations have been made by SEBI in Listing Regulations vide its notification dt: 9^th May 2018.  

(2)   These corporate governance changes brought in by way of SEBI notification dt: 9^th May 2018 have become effective from 1^st April 2019. 

(3)  In order to incorporate these changes in the quarterly compliance report on corporate governance SEBI vide this circular dt: July 16, 2019 amendmended the quarterly compliance report on corporate governance.

(4)   Now vide this circular SEBI has specified three separate amended formats for quarterly 

compliance report on Corporate Governance:
a) Annexure I: on Quarterly basis
b) Annexure II: at the end of a financial year (for the whole of financial year)
c) Annexure III: within six months from end of a financial year. This may be submitted along with the second quarter’s report.

(5) The amended quarterly compliance report on corporate governance will be applicable from quarter ended September 30, 2019. It will be applicable to all those companies to whom Regulation 27(2) of SEBI(LODR) Regulations is applicable.

A copy of SEBI circular is attached herewith for ready reference:

https://www.sebi.gov.in/legal/circulars/jul-2019/circular-on-modification-of-circular-dated-september-24-2015-on-format-for-compliance-report-on-corporate-governance-to-be-submitted-to-stock-exchange-s-by-listed-entities-_43582.html

Submission of Committee details under the Sexual Harassment of Women at Workplace Act

Another buzz which is lately alarming many organisations is letter issued by the Office of the District Women and Children Development Officer. The letter is widely circulated on social media. The letter mandates all establishments in Mumbai to register the details of Internal Committee constituted as per the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 (POSH) by 20 July, 2019. The details of committee are also required to be given in the Board report under section 134 of the Companies Act, 2013. 

Every employer of workplaces that have 10 employees or more are required to constitute an IC, as per the provisions of POSH to hear and redress grievances pertaining to sexual harassment. The details of same were also shared in the earlier newsletter.[1]

If an employer fails to constitute an IC or does not comply with the requirements prescribed under the POSH Act, he may be liable to a penalty of Rs. 50,000/-. A repetition of offence may be punishable with a fine for twice such amount, as well as be liable to cancellation or non-renewal of its business licenses, registrations or approvals by the government or local authorities

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[1] https://mmjcadvisoryblog.blogspot.com/2019/03/have-you-constituted-internal-committee.html

BEN 2 - Additional fees being charged by MCA

1. Background:-

The Ministry of Corporate Affairs (MCA) had amended the Companies (Significant Beneficial Owners) Rules, 2018 (“SBO Rules”) vide an amendment effective from 8^th February 2019. These Amended SBO Rules clarified the concept of Significant Beneficial Owner, as referred in Section 90 of the Companies Act, 2013.

As per the amended SBO Rules, following due dates were prescribed:-

The Significant Beneficial Owners (SBO) for any Company were required to file a declaration in Form BEN-1 with the reporting company within 90 days from the commencement of the amended Rules, i.e., within 90 days from 8^th February 2019, i.e., on or before 9^th May 2019.

Upon receipt of BEN-1, the Reporting Company is required to file a return in Form No. BEN-2 with the Registrar of Companies within a period of 30 days from the date of receipt of Form BEN-1, i.e., the last date for filing of BEN-2 with ROC was 8^th June 2019.

As per the SBO Rules, Form BEN-1 is a format which can be filled physically by the SBOs. However, Form BEN-2 is an e-Form. MCA had not deployed e-Form BEN-2 on MCA portal even till 8^th June 2019, i.e., the due date of filing BEN-2 as per SBO Rules.

2. Deployment of e-form BEN-2:-

Now, e-Form BEN-2 is deployed on MCA portal with effect from 1^st July 2019. As per an earlier Circular issued by MCA dated 6^th September 2018, “the time-limit for filing BEN-2 form would be 30 days from the date of deployment of BEN-2 eform on the MCA portal and no additional fees will be levied if the same is filed within 30 days from the date of deployment of the said e-form.”

However, as per the Help-kit of e-Form BEN-2, Normal fees shall be levied till 30 days from the date of receipt of declaration in BEN-1 and thereafter additional fees shall be levied as per the Companies (Registration Offices and Fees) Rules, 2014. 

3. Due date for receipt of BEN-1 from SBOs and its impact on BEN-2:-

There was no extension in the due date for receipt of BEN-1 from SBOs, and hence the last date for receipt of BEN-1 was 9^th May 2019.  Hence, while filing any Form BEN-2, in the tab asking “date of receipt of declaration in BEN-1”, the reporting company shall be entering any date on  or before 9^th May 2019 in all cases where BEN-1 is received within the due date. Hence, while uploading BEN-2 forms, as per the Help-kit and the technical calculation available with MCA Fee calculator, the MCA system is levying Additional fees for all such e-forms BEN-2 wherever BEN-1 was received within the due date.

As per the above mentioned MCA Circular dated 6^th September 2018, normal fees should be charged by MCA for all BEN-2 forms which shall be filed by companies within 30 days from the date of deployment of e-form BEN-2 on MCA portal, i.e., normal fees should be levied till 31^st July 2019 (as e-form BEN-2 was deployed on 1^st July 2019).

It seems MCA system is yet to be upgraded to accept BEN-2 forms as per this Circular, or else all companies will end up paying Additional fees for BEN-2 forms even if it is filed today….

Extension of due date for Annual Return on Foreign Liabilities and Assets (FLA) filing

Reserve Bank of India (RBI) in furtherance to notification RBI/2018-19/226 A.P. (DIR Series) Circular No. 37[1] relating to FLA new reporting system (Reporting in Foreign Liabilities and Assets Information Reporting (FLAIR) system) have further announced[2] that in view of the recent change in the reporting platform for submission of FLA return, the last date for FLA filing for the reporting year 2018-19 has been extended upto 31^st July 2019.

Thus, the due date for submission of FLA only for reporting year 2018-19 shall be 31^st July 2019

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[1] https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NT226CBAA4706347E46429D5034B4671A6F60.PDF

[2] https://flair.rbi.org.in/fla/faces/pages/login.xhtml

Can Buybacks be withdrawn under SEBI (Buyback of Securities) Regulations 2018 and Companies (Share Capital and Debenture) Rules 2014?

Union budget of 2019 has proposed to levy 20% buyback tax on all buybacks of securities. This tax would be levied on all buybacks including those buybacks which are open as on 5^th July 2019.

So we are left with a question as to can a company withdraw its buyback once it is announced or opened?  For this purpose let us peruse the provisions of relevant regulations/acts:

Ø  SEBI (Buyback of Securities) Regulations 2018(“Buyback regulations”): Listed companies making buybacks of securities are governed by provisions of Buyback Regulations. Regulation 24(i)(d) of Buyback regulations governs the provisions relating to withdrawal of buyback.

Ø  Regulation 24(i)(d) of Buyback regulations reads as follows:

“the company shall not withdraw the offer to Buyback after the draft letter of offer is filed with Board or public announcement of the offer to Buyback is made”.

It means that once the draft letter of offer is filed with SEBI or once public announcement is made buyback offer cannot be withdrawn under Buyback regulations.

Ø  Companies Act and rules made thereunder: Similar provisions also exists for unlisted public companies and private companies under Rule 17(10)(d) of Companies (Share Capital and Debentures) Rules 2014 which reads as follows:

“the company shall not withdraw the offer once it has announced the offer to the shareholders”

So unlisted public companies and private companies also cannot withdraw the buyback offer once it has announced it to shareholders

 

Ø  So both under Companies Act and Buyback Regulations it is not possible to withdraw the Buyback once it is announced.

In the context of Union Budget 2019 proposing to levy Buyback Tax at 20% it will be impossible for companies who have already announced the Buybacks to withdraw the same. 

What will prevail in case of death of shareholder – A Probate of Will or Nomination under the Companies Act?

Introduction: 

The law of nomination by a shareholder is contained in Section 72 of Companies Act, 2013 (the Act).  The corresponding provision in the Companies Act, 1956 was section 109A.

It states that, every holder of securities of a company may, at any time nominate any person to whom his securities shall vest in the event of his death in prescribed form (Form SH-13). The purpose of this provision is to ease stipulation for the company in case of transmission of shares after the death of shareholder.

Further Sub-section (3) of Section 72 reads as follows:

“Sec. 72 (3) Notwithstanding anything contained in any other law for the time being in force or in any disposition, whether testamentary or otherwise, in respect of the securities of a company, where a nomination made in the prescribed manner purports to confer on any person the right to vest the securities of the company, the nominee shall, on the death of the holder of securities or, as the case may be, on the death of the joint holders, become entitled to all the rights in the securities, of the holder or, as the case may be, of all the joint holders, in relation to such securities, to the exclusion of all other persons, unless the nomination is varied or cancelled in the prescribed manner.”

After the plain reading of section 72(3), it infers that being the non-obstante clause and the expression of ‘vest” in the section, once the nomination is made as per the prescribed manner of law, the shares/securities shall vest to the nominee on the death of the holder of shares/securities.

So does it mean, a nominee of a holder of shares or securities on the basis of nomination under section 72 of the Act is entitled to all rights in respect of the shares or securities and excludes other persons who are entitled to inherit securities or shares under law of inheritance?

Harsha Nitin Kokate V. Saraswat Co-op Bank Ltd. [2010] -

Single judge bench of Bombay High Court (hereinafter referred as the “Kokate”) in this case has held that the nominee becomes the owner of the shares thereof after the death of the original owner, Upon such nomination which as per procedure prescribed by law, all the rights incidental to ownership would follow. The learned judge said:

“A reading of section 109A of the Companies Act 1956 and 9.11 of the Depositories Act makes it abundantly clear that the intent of the nomination is to vest the property in the shares which includes the ownership rights thereunder in the nominee upon nomination validly made as per the procedure prescribed, as has been done in this case. These sections are completely different from section 39 of the Insurance Act set out which require a nomination merely for the payment of the amount under the Life Insurance Policy without confirming any ownership rights in the nominee or under section 30 of the Maharashtra Cooperative Societies Act which allows the Society to transfer the shares of the member which would be valid against any demand made by any other person upon the Society. Hence these provisions are made merely to give a valid discharge to the Insurance Company or the Co-operative Society without vesting the ownership rights in the Insurance Policy or the membership rights in the Society upon such nominee. The express legislature intent under Section 109A of the Companies Act and Section 9.11 of the Depositories Act is clear”

Another interesting point to be raised here is does it mean any nomination make the legal heirs completely lose right to inherit property of the deceased as the nominee is the only legal heir of the deceased shareholder?

Jayanand Jayant Salgonkar V. Jayashree jayant Salgaonkar [2015]: 

The matter again rose up  before the single bench of Bombay High Court in Jayanand Jayant Salgonkar V. Jayashree jayant Salgaonkar and Ors. [2015] 190 Comp Cas 44 (Bom) on 1 December, 2016. The judge stated that the decision of Kokate case(Supra) it was per incuriam,  that legal heirs and not the nominees will obtain the ownership rights of share certificates. 

The learned judge fittingly observed:

Nominee has the fiduciary duty to hold the proceeds as a trustee for the rightful heirs of the deceased!

“The interpretation on Section 109A and Bye-Law 9.11 placed by the Kokate Court does not seem to me to be reconcilable with the explicit decisions of the Supreme Court and of this Court. What was the 'mischief', if any, sought to be avoided by those two statutes? The succession law is unchanged. There are no further complications on account of testamentary or intestate succession. The nature of corporate instruments and securities has, however, undergone a massive change and so has the way corporations (including banks and depositories) conduct their business. The fundamental focus of Section 109A and Section 109B of the Companies Act and Bye-Law 9.11 of the Depositories Act is not the law of succession, nor is it intended to trammel that in any way. The sole intention is, quite clearly, to afford the company or depository in question a legally valid quittance so that it does not remain forever answerable to a raft of succession litigations and an endless slew of claimants under succession law. It allows that liability to move from the company or the depository to the nominee. The company or depository gets a legally valid discharge; but the nominee continues to hold in a fiduciary capacity and is answerable to all claimants under succession law.”

Further the provisions relating to nominations under various Enactments have been consistently interpreted by Apex court, In Sarbati Devi v. Usha Devi [1948] 55 Comp Cas 241, supreme court held that a mere nomination made under section 39 of the Insurance Act does not have the effect of conferring on the nominee any beneficial interest in the amount payable under the life insurance policy on the death of policyholder. The nomination only indicates the hand which is authorised to receive the amount, on the payment of which the insurer gets a valid discharge of liability under the policy. The amount however can be claimed by the heirs of the assured, i.e., policyholder, in accordance with the law of succession governing them.

The Court held that that the rights of a nominee to shares of a company cannot override the rights of legal heirs of deceased and therefore the amount received by the nominee can be claimed by the legal heirs of the deceased

Conclusion:

The said judgment has cleared the controversy and restored the law to what clearly is the correct position – a nomination of shares/securities is only a facility to enable the company to discharge its obligation. However, the nominee has the fiduciary duty to hold the proceeds as a trustee for the rightful heirs of the deceased.