Addition to conditions for E-Commerce Activity

In order to tighten control on activities conducted by entities under E-commerce activities, Department of Industrial Policy and Promotion vide Press note 2 (2018 Series) dated 26 December 2018 has altered point 5.2.15.2 of Consolidated Policy Circular 2017 i.e E-commerce Activities by adding the following to existing conditions :

1. Ownership and control over the inventory defined: Inventory of a vendor will be deemed to be controlled by e-commerce marketplace entity if more than 25% of purchases of such vendor are from the marketplace entity or its group companies.
2. Equity participation or control on inventory by e-commerce marketplace entity or its group companies: An entity having equity participation by e-commerce marketplace entity or its group companies, or having control on its inventory by e-commerce marketplace entity or its group companies, will not be permitted to sell its products on the platform run by such marketplace entity.
3. E-Commerce marketplace entity to perform on fair and non-discriminatory manner: Services should be provided by e-commerce marketplace entity or other entities in which e-commerce entity has direct or indirect equity participation or control, to vendors on the platform at arm’s length and in a fair and non- discriminatory manner.
4.  E-Commerce marketplace entity cannot mandate the sale of any product exclusively on its platform.
5.  Annual Compliance Certificate: Companies carrying E-Commerce activities have to annually furnish certificate along with report confirming compliance of e-commerce guidelines by statutory auditor. The said certificate is to be filed by 30 September for the preceding financial year.

The amendment is effective from 1 February 2019.

Amendment in Rules

Ministry of Corporate Affairs (MCA) vide notifications dated 18^th December 2018 has amended the following rules:

1. Companies (Incorporation) Rules, 2014
2. Companies (Registration of Charges) Rules, 2014

Highlights of the amendment are as follows:

• Declaration for Commencement of Business u/s10A is to be filed in e-form INC-20A. Further, in case of a company pursuing objects requiring registration or approval from any sectoral regulators, the approval is also required to be obtained and attached with the form
• The Procedure is prescribed for taking the approval from the Regional Director
• Conversion of Public Company into Private Company
• Change in Financial year  
• In case if no order for approval or re-submission or rejection has been explicitly made by the Regional Director within the stipulated time, an application shall stands approved and an approval order shall be automatically issued to the applicant.
• E-form CHG-4 has been changed and has been aligned with the amendment of Companies (Amendment) Act, 2017 [E-form CHG-4 for Satisfaction of Charge can now be filed within 300 days with additional fees as applicable without Condonation of delay]

Detailed Guidelines on Creation of segregated portfolio or side-pocketing for debt and money market instruments  is soon to be issued by SEBI 

SEBI has  allowed debt mutual funds to have a “side pocket” that will allow fund managers to segregate their holdings .

A mutual  fund side pocketing helps separate risky assets from other investments and cash holdings. It ensures that the money invested in a mutual fund liquid scheme, which is linked to stressed assets, gets locked, until the fund recovers the money from the company. Investors can redeem the rest of their money.

Side Pocketing stops redemption pressure and prevent fund managers from selling the liquid assets at distress price .

Help that mutual fund side-pocketing will provide to  retail investors 

Once the affected papers—the ones facing a default—are segregated from the rest of the holdings, there will be two sets of net asset values for the mutual fund scheme. 

On segregation ,investments in the toxic asset will be closed for subscription, while investors can continue to subscribe to or redeem part of their investment in healthy assets. 

In the absence of segregation in a crisis situation institutional investors have  the first right to redemptions and retail investors are stuck with toxic assets, the segregation will help avoid such a situation .

Uniform valuation methodology for pricing of corporate bonds which shall be followed uniformly across all the mutual funds will soon been released by SEBI

CS Makarand Joshi

https://www.financialexpress.com/market/detailed-sebi-guidelines-on-side-pocketing-soon/1417974/

Insolvency Bids Defaulting Winners May Land in Jail

There have been many instances in the past where winning bidders have failed to pay up for the stressed firms they proposed to acquire for various reasons, including the inability to raise money to fund such acquisitions. the most prominent one being that of UK-based Liberty House in the Amtek Auto case .

The Government is proposing to invoke a stringent provision in the Code, that provides for a jail term, to deal with such wilful defaulters among winning bidders. Delhi-based Amtek Auto’s insolvency resolution process was initiated on Corporation Bank’s plea. Amtek’s total dues to lenders at the time when the company was admitted by the Chandigarh bench of NCLT was `12,603 crore. Liberty’s House bid was approved by the lenders on April 4, 2018, by a 94.2% vote.NCLT on July 25 approved Liberty’s plan that sought to pay financial creditors Rs 3,225 crore upfront and make a fresh infusion of Rs. 500 crores into the company for improving operations. However, the UK-based firm could not make the promised upfront payment in time, the lenders last week decided to move the NCLT, seeking directions on the way forward

Srinivas FE Corporate Affairs has stated to the media that the government might look at including dishonoring of an NCLT-approved plan as one of the disqualification criteria under Section 29A (which bars wilful corporate defaulters from submitting bids under IBC process). “Regulations could be tweaked to include earnest money deposit as a certain percentage of bid value or liquidation value, which can be forfeited” if an approved resolution plan is not implemented by the bidder.

https://www.financialexpress.com/industry/insolvency-winners-default-stern-steps-soon-jail-term-provision-may-be-involved/1403773/

SEBI circular for Disclosure of reasons for delay in submission of financial results by listed entities

Regulation  33 of the Securities  and  Exchange  Board  of  India  (Listing Obligations  and  Disclosure  Requirements)  Regulations, 2015  (“Listing Regulations”), inter-alia, specifies  timelines  for  submission  of  financial results by listed  entities.

Accordingly, the quarterly and annual  financial results  are  to  be  submitted by listed  entities to stock  exchanges within forty-five/sixty days from  the end  of the quarter/financial  year, as the case may be.   In case of non-compliance of various provisions of the Listing Regulations including non-submission / delayed submission of financial results, SEBI has  prescribed a  standard operating procedure (providing for levy  of penalties,  freezing  of  promoter  shareholding,  suspension  of  trading, etc.) through certain circulars, the latest being the circular dated May 3, 2018.

Now, SEBI has issued another Circular in this regard dated November 19,  2018, in view of the fact that whenever there were delays in submission of financial results by certain listed entities to the stock exchanges in the past, the fact of delay was intimated but the reason for the delay was not disclosed or not brought out clearly. Due to this investors were often left unaware as to the reasons for such delay.

Now, as per this Circular:

a. If any listed entity does not submit its financial results in accordance with the timelines specified in Regulation 33 ofthe Listing Regulations, the listed entity shall disclose detailed reasons for such delay to the stock exchange within one working day of the due date of submission of results as required under Regulation 33.

b. If the decision to delay the result was taken by listed entity prior to due date, the listed entity shall disclose the detailed reasons for such delay to the stock exchange to the stock exchanges within one working day of such decision.

The said circular can be downloaded from the following link:

https://www.sebi.gov.in/legal/circulars/nov-2018/disclosure-of-reasons-for-delay-in-submission-of-financial-results-by-listed-entities_41040.html

Proposed Amendments in the Companies Act, 2013

To strengthen the corporate governance & enforcement framework, the Ministry of Corporate Affairs (MCA) has proposed amendments in the Companies Act, 2013 and invited comments on it.  The key highlights of the proposed amendment are as follows:

1. Provision for conversion of section 8 Company into any other kind is omitted
2. Only intimation is required Instead of approval from Registrar (ROC) for prospectus
3. Company is now required to take all necessary steps to find out individual who is Significant Beneficial Owner (SBO) and if there is any, make such SBO comply with the provisions
4. A Company who has not completed 3 financial years since inception, is now required spend as per Corporate Social Responsibility(CSR) policy
5. Any amount remaining unspent on CSR is required to be transferred to special account within 30 days from the date of end of that financial year and such amount is required to be spent by the company in pursuance of CSR policy within a period of 3 financials years from the date of such transfer 
6. The sitting fees and expenses incurred for participation in the meetings of Board and Committees shall not be considered for the purpose of assessing pecuniary relationship of an Independent Director (ID)
7. Pecuniary relationship of an ID is restricted to 25 % of total income of ID out of which professional or any other services rendered by an ID shall not account for more than 10% of the total income
8. ID is required to file return with ROC containing particulars of Declaration of Independence u/s 149
9. ID is mandatorily required to file DIR-11 with ROC u/s 168
10. The effective date of resignation of ID will be 30th day from the date of receipt of such notice by the company or any other date as specified in the notice whichever is latter
11. Central Government may prescribe rules for merger or amalgamation between two or more small companies or between a holding company and its wholly-owned subsidiary company or such other companies as may be prescribed.   
12. In case of oppression and mismanagement (fraud, misfeasance, breach of trust etc.), if tribunal passes order specifying that the respondent is not a fit and proper person, he will be disqualified to act as director in that company and other companies for a period of 5 years from the date of said order
13. In case of struck off Companies, all the property and rights held by such Company  or held in trust for such Company before the date of strike off, shall vest absolutely in the Central Govt., which shall be free from all encumbrances for the Central Govt

The link of  Notice inviting comments is:

http://www.mca.gov.in/Ministry/pdf/NoticeAmendmentsCA2013_05112018.pdf

Property to vest with Central Government in case of struck off

Ministry of Corporate Affairs (MCA) by way the Companies Amendment (Ordinance), 2018 (Ordinance) has made amendments in the various provisions of the Companies Act, 2013 (the Act). Further, MCA has proposed certain Amendment in the Companies Act, 2013. With the combined reading of said amendments, the Registrar may strike off the company on the following grounds:

1. The Company which has not obtained the status of dormant company and

1. Company is not carrying on any business or operation for a period of two immediately preceding financial years  OR

2.  Company is not filing financial statements and annual returns during the last two financial years; OR

3. Company is not having significant accounting transaction during the last two financial years

2. Subscribers have not paid the subscription money at the time of incorporation and a declaration to that is not be filed with the registrar within 180 days from the date of incorporation (Ordinance)

3. Company is not carrying on any business or operation on the physical verification of registered office by the ROC u/s 12(9) (Ordinance)

As per proposed amendment of the all the property and rights held by the Company or held in trust for the Company before the date of strike off, shall vest absolutely in the Central Government., which shall be free from all encumbrances for the Central Government. 

Securities Lending and Borrowing transactions by insiders to attract insider trading norms

Securities and Exchange Board of India (SEBI) has issued informal guidance to HDFC Securities Limited with respect to whether transactions of lending and borrowing done under Securities Lending and Borrowing Scheme (SLBS) fall within the definition of trading/trade under SEBI (Prohibition of Insider Trading) (PIT) Regulations, 2015.

       Facts of the case are as follows:

·      HDFC Securities Limited (HSL) is registered stock broker with SEBI and trading member  with BSE and NSE

·    It is also registered with AMFI as distributor of Mutual Funds and Corporate agent of Insurance registered with IRDA

·      Selected senior employees (designated persons) of few companies are allotted shares under   ESOP

·   These senior employees may be considered as insider and may  possess unpublished price sensitive information (UPSI) of their company whose shares they intend to lend in SLB

·    As per Section 47(xv) of the Income Tax Act, transactions done under SLB  shall not be regarded as transfer under Section 45 as ownership of the securities remains with the lender and does not get transferred to borrower

Query: Whether SEBI (PIT) Regulations 2015 are applicable to SLB transactions where senior employees of the companies lend shares who are in possession of unpublished price sensitive information (UPSI)? ?

Reply by SEBI:

•  SLB mechanism is temporary  lending and borrowing of securities in the form of contracts which  are traded on an automated screen based order matching platform
•  The title of the securities vests with the lender during the lending period
• Borrower is entitled to deal with or dispose of the securities as per the SLB Contract  and is also required to return the securities at the end of the contract

•      Regulation 4(1) of SEBI (PIT) Regulations, 2015:

No insider shall trade in securities that are listed or proposed to be listed on a stock exchange when in possession of unpublished price sensitive information:

Provided that the insider may prove his innocence by demonstrating the circumstances

•  Regulation 2(L) of SEBI (PIT) Regulations, 2015:

"trading" means and includes subscribing, buying, selling, dealing, or agreeing to subscribe,  buy,sell, deal in any securities, and "trade" shall be construed accordingly

NOTE: Under the parliamentary mandate, since the Section 12A (e) and Section 15G of the Act employs the term 'dealing in securities', it is intended to widely define the term “trading” to include dealing. Such a construction is intended to curb the activities based on unpublished price sensitive information which are strictly not buying, selling or subscribing, such as pledging etc. when in possession of unpublished price sensitive information

• Hence, transaction of borrowing and lending done under SLB constitute trade such transaction by employees of companies who are in possession of UPSI would hence attract PIT regulations.

Adjudication Order in respect of The Karur Vysya Bank Ltd in the matter of Arvind Remedies Ltd

Case:  Adjudication Order in respect of The Karur Vysya Bank Ltd in the matter of Arvind Remedies Ltd

Violation of: 

             Regulation 29(1) and 29(2) read with Regulation 29(3) of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (hereinafter referred to as "SAST Regulations, 2011") and Regulations 13(1), and 13(3) read with Regulation 13(5) of Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 (hereinafter referred to as "PIT Regulations, 1992")

Parties: Karur Vysya Bank Ltd (hereinafter referred to as “Noticee”)

Arvind Remedies Ltd. (hereinafter referred to as “ARL / the company”)

 

Examination Period: January 01, 2014 to January 31, 2015

Facts of the case:

·      ARL had taken a short term loan of Rs. 25 Crores from the Noticee for the purpose of working capital requirements for which 75,00,000 shares of ARL were pledged by the promoter – Arvindkumar B Shah.

·     Subsequently, the Noticee has invoked pledge of 75,00,000 shares of ARL on various dates. It was alleged that due to invocation of pledge, the shareholding of the Noticee increased to 40,29,500 shares, constituting 5.91% of the total share capital of ARL, on October 15, 2014.

·     As the shareholding of the Noticee crossed 5% of the share capital of ARL, the Noticee was required to make requisite disclosure, within two working days, to the company under Regulation 13(1) of PIT Regulations, 1992, and

·     Under Regulation 29(1) read with 29(3) of SAST Regulations, 2011 the Noticee was required to disclose the same to the Stock Exchanges and Company.

·      However, no disclosures as stipulated under afore-mentioned Regulations were made by the Noticee thereby violating Regulation 13(1) of PIT Regulations, 1992 and Regulation 29(1) and 29(3) of SAST Regulations, 2011.

               

·       Further it was observed that due to the invocation of pledged shares, the shareholding of the Noticee had further increased to 63,29,500 shares, constituting 9.29% of the total share capital of ARL, on January 27, 2015. As prior to the said acquisition, Noticee was already holding more than 5% of the share Capital of ARL and the said acquisition of shares was more than 2% of the share capital of ARL.

·      The Noticee was required to make requisite disclosure in this regard within two working days of the acquisition to the company under Regulation 13(3) read with 13(5) of PIT Regulations, 1992, and to the company and stock exchanges under Regulation 29(2) read with Regulation 29(3) of SAST Regulations, 2011. However, no disclosures as stipulated under afore- mentioned Regulations were made by the Noticee.

Issues:

a.  Whether the Noticee failed to disclose the change in its shareholdings to the stock exchanges and the company, and thereby violated Regulation 29(1) and 29(2), read with 29(3) of SAST Regulations, 2011, and Regulations 13(1), and 13(3) read with 13(5) of PIT Regulations, 1992?

b.   Does the violation, if established, attract monetary penalty under Section 15A (b) of SEBI Act, 1992?

c.   Quantum of Penalty

Show Cause Notice, Replies and Personal Hearing

Show Cause Notice dated March 13, 2018 was issued for the aforesaid violations to which the following replies were submitted

·     Regulation 29(4) states that Regulation 29 shall not be applicable to Scheduled Commercial Bank or Public Financial Institution and since Karur Vyas Bank is a Scheduled Commercial Bank, provisions of Regulation 29 of SAST Regulations, 2011 is not applicable to the noticee

·      At no point, the noticee held more than the threshold limit of 5 % of the share capital of ARL, hence no disclosure required under Regulation 13 (1) of PIT Regulations, 1992 and Regulation 29(2) and 29 (3) of SAST Regulations, 2011 not required. Continual disclosure as per Regulation 13 (3) read with Regulation 13(5) also not applicable to the Noticee.

·      Bank has intimated to ARL on the invocation of pledged shares as also the disposal of invoked shares vide letter dated 13.12.2014 and 17.02.2015.

During the personal hearing granted to the Noticee, the following submissions were made -

·     Noticee invoked the pledges on various dates and immediately sold the shares in the market through proper market mechanism and had at no time shares exceeding the prescribed limits in the SAST and PIT regulations.

·      Noticee’s highest holding during the relevant period (i.e. September 08, 2014 to February 23, 2015) was on 15.10.2014 which amounted to 2.94% which was below the threshold limit for disclosure under SAST and PIT Regulations.

·   Noticee further submitted that they are a bank of 100 years of existence and shares were acquired in the normal course of banking transaction by invoking the security given for the loan.

Findings

The Noticee  invoked a total of 75,00,00 shares during the period from September 08,2015 to February 02, 2015 and  the pledged shares were invoked  in tranches on various dates further they were  immediately or shortly sold  afterwards, in the market.

The shareholding of the Noticee was constantly fluctuating and the same ranged between 1.51% to nil during the period from September 08, 2014 to February 24, 2015.

The highest shareholding of the Noticee during the above period was on October 08, 2014 and October 15, 2014, when it held 20,00,000 shares, amounting to 2.94% of the shareholding of ARL, which is much below the threshold of 5% specified under the SAST Regulations, 2011 and the PIT Regulations, 1992.

In view of the same, the Adjudicating Officer is of the view that the requirement for disclosure under the SAST Regulations, 2011 and PIT Regulations, 1992 cannot be cast on the Noticee.

                                            

Adjudication Order:

No penalty is warranted against the Noticee in the matter and accordingly the matter is disposed of.

Case:  Adjudication Order in respect of The Karur Vysya Bank Ltd in the matter of Arvind Remedies Ltd

Violation of: Regulation 29(1) and 29(2) read with Regulation 29(3) of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (hereinafter referred to as "SAST Regulations, 2011") and Regulations 13(1), and 13(3) read with Regulation 13(5) of Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 (hereinafter referred to as "PIT Regulations, 1992")

Parties: Karur Vysya Bank Ltd (hereinafter referred to as “Noticee”)

Arvind Remedies Ltd. (hereinafter referred to as “ARL / the company”)

 

Examination Period: January 01, 2014 to January 31, 2015

Facts of the case:

·      ARL had taken a short term loan of Rs. 25 Crores from the Noticee for the purpose of working capital requirements for which 75,00,000 shares of ARL were pledged by the promoter – Arvindkumar B Shah.

·         Subsequently, the Noticee has invoked pledge of 75,00,000 shares of ARL on various dates. It was alleged that due to invocation of pledge, the shareholding of the Noticee increased to 40,29,500 shares, constituting 5.91% of the total share capital of ARL, on October 15, 2014.

·         As the shareholding of the Noticee crossed 5% of the share capital of ARL, the Noticee was required to make requisite disclosure, within two working days, to the company under Regulation 13(1) of PIT Regulations, 1992, and

·         Under Regulation 29(1) read with 29(3) of SAST Regulations, 2011 the Noticee was required to disclose the same to the Stock Exchanges and Company.

·       However, no disclosures as stipulated under afore-mentioned Regulations were made by the Noticee thereby violating Regulation 13(1) of PIT Regulations, 1992 and Regulation 29(1) and 29(3) of SAST Regulations, 2011.

               

·       Further it was observed that due to the invocation of pledged shares, the shareholding of the Noticee had further increased to 63,29,500 shares, constituting 9.29% of the total share capital of ARL, on January 27, 2015. As prior to the said acquisition, Noticee was already holding more than 5% of the share Capital of ARL and the said acquisition of shares was more than 2% of the share capital of ARL.

·      The Noticee was required to make requisite disclosure in this regard within two working days of the acquisition to the company under Regulation 13(3) read with 13(5) of PIT Regulations, 1992, and to the company and stock exchanges under Regulation 29(2) read with Regulation 29(3) of SAST Regulations, 2011. However, no disclosures as stipulated under afore- mentioned Regulations were made by the Noticee.

Issues:

a.  Whether the Noticee failed to disclose the change in its shareholdings to the stock exchanges and the company, and thereby violated Regulation 29(1) and 29(2), read with 29(3) of SAST Regulations, 2011, and Regulations 13(1), and 13(3) read with 13(5) of PIT Regulations, 1992?

b.    Does the violation, if established, attract monetary penalty under Section 15A (b) of SEBI Act, 1992?

c.       Quantum of Penalty

Show Cause Notice, Replies and Personal Hearing

Show Cause Notice dated March 13, 2018 was issued for the aforesaid violations to which the following replies were submitted

·      Regulation 29(4) states that Regulation 29 shall not be applicable to Scheduled Commercial Bank or Public Financial Institution and since Karur Vyas Bank is a Scheduled Commercial Bank, provisions of Regulation 29 of SAST Regulations, 2011 is not applicable to the noticee

·        At no point, the noticee held more than the threshold limit of 5 % of the share capital of ARL, hence no disclosure required under Regulation 13 (1) of PIT Regulations, 1992 and Regulation 29(2) and 29 (3) of SAST Regulations, 2011 not required. Continual disclosure as per Regulation 13 (3) read with Regulation 13(5) also not applicable to the Noticee.

·      Bank has intimated to ARL on the invocation of pledged shares as also the disposal of invoked shares vide letter dated 13.12.2014 and 17.02.2015.

During the personal hearing granted to the Noticee, the following submissions were made -

·      Noticee invoked the pledges on various dates and immediately sold the shares in the market through proper market mechanism and had at no time shares exceeding the prescribed limits in the SAST and PIT regulations.

·       Noticee’s highest holding during the relevant period (i.e. September 08, 2014 to February 23, 2015) was on 15.10.2014 which amounted to 2.94% which was below the threshold limit for disclosure under SAST and PIT Regulations.

·    Noticee further submitted that they are a bank of 100 years of existence and shares were acquired in the normal course of banking transaction by invoking the security given for the loan.

Findings

The Noticee  invoked a total of 75,00,00 shares during the period from September 08,2015 to February 02, 2015 and  the pledged shares were invoked  in tranches on various dates further they were  immediately or shortly sold  afterwards, in the market.

The shareholding of the Noticee was constantly fluctuating and the same ranged between 1.51% to nil during the period from September 08, 2014 to February 24, 2015.

The highest shareholding of the Noticee during the above period was on October 08, 2014 and October 15, 2014, when it held 20,00,000 shares, amounting to 2.94% of the shareholding of ARL, which is much below the threshold of 5% specified under the SAST Regulations, 2011 and the PIT Regulations, 1992.

In view of the same, the Adjudicating Officer is of the view that the requirement for disclosure under the SAST Regulations, 2011 and PIT Regulations, 1992 cannot be cast on the Noticee.

                                            

Adjudication Order:

No penalty is warranted against the Noticee in the matter and accordingly the matter is disposed of.

Set-off of Export Receivables against Import Payables

There have been many times in business practice wherein the imports and exports are related to the same manufacturer/trader. Many cases have been found that the importer wants to set off their trade payables with the trade receivables.

Reserve Bank of India (RBI), as a measure to resort such cases, have prescribed the regulations for setting-off of export receivables against import payables, but the same are subject to certain terms and conditions as stated below:

ü  The import must be as per the Foreign Trade Policy in force.

ü  Invoices/Bills of Lading/Airway Bills and Exchange Control copies of Bills of Entry for home consumption have been submitted by the importer to the Authorized Dealer bank.

ü  Payment for the import is still outstanding in the books of the importer.

ü  Both the transactions of sale and purchase may be reported separately in R-Returns (NOSTRO and VOSTRO) and Foreign Exchange Transactions – Electronic Reporting System (FETERS)

ü  The relative EDF will be released by the AD bank only after the entire export proceeds are adjusted / received.

ü  The set-off of export receivables against import payments should be in respect of the same overseas buyer and supplier and that consent for set-off has been obtained from him.

ü  The export / import transactions with Asian Clearing Union (ACU) countries should be kept outside the arrangement.

ü  All the relevant documents are submitted to the concerned AD bank who should comply with all the regulatory requirements relating to the transactions.