Additional investment opportunities to Mutual Fund for unclaimed Redemption and Dividend amounts

SEBI wide its circular SEBI/HO/IMD/DF2/CIR/P/2016/17 dated 25^th February 2016 allowed certain additional investment opportunities to Mutual Fund for unclaimed redemption and dividend amounts which is effective from 1^st April 2016. The unclaimed redemption and dividend amounts are currently allowed to be deployed only in call money market or money market instruments. Now it is also allowed to be invested in following with certain conditions:-

• Separate plan of liquid scheme /money market mutual fund scheme floated by mutual funds specifically for deployment of the unclaimed amounts
•  AMCs shall not be permitted to charge any exit load in this plan
• Total Expense Ratio (TER) of such plan shall be capped at 50 bps

Further Mutual funds has to take following actions to ensure a pro-active role in tracing the rightful owner of the unclaimed amounts:

• Provide list of names and addresses of investors in whose folios there are unclaimed amounts on its website
• AMFI to provide the consolidated list of such investors across Mutual Fund industry on its website
• Investor can obtain information about such unclaimed money only after providing proper credentials and adequate security control measure by Mutual fund
• Mutual fund and AMFI shall disclose process of claiming unclaimed amount and necessary forms etc on their websites.
• Information on unclaimed amount along with its prevailing value (based on income earned on deployment of such unclaimed amount), shall be separately disclosed to investors through periodic statement of accounts/ consolidated account statement sent to investor
• Investor claiming the unclaimed amount during 3 years from its due date shall be paid such amount alongwith income earned on its deployment
• Investor claiming the unclaimed amount after 3 years from its due date shall be paid such amount along with income earned on its deployment till the end of the third year. After the third year the income earned on such unclaimed amounts shall be used for the purpose of investor education.

Automatic Disqualification is triggered for Managing Director (MD) turning the age of 70 years

This is with reference to Bombay High Court (Division bench ruling), wherein it was held that automatic disqualification is triggered for Managing Director (MD) turning the age of 70 years, even though such appointment was made prior to coming into effect  of Companies Act,2013.

Following is the gist of the ruling in the matter of :

Sridhar Sundararajan…                              Original Plaintiff/Appellant

V/s

Ultramarine & Pigments Limited…             Respondent No.1

Rangaswamy Sampath….                              Respondent No.2

Sridhar Sundaranajan plaintiff of the original case has filed a petition to Hon’ble Bombay High Court for restraining Respondent No.2 from continuing his powers as Chairman and Managing Director (CMD) beyond the age of 70 years. The case was dismissed by single bench of Hon’ble Bombay High Court thereby allowing the Respondent No.2 to continue as CMD

Thereafter the plaintiff has filed an appeal against the said order and Divisional Bench of Hon’ble Bombay High Court has reversed the ruling of single bench and the summary of the same is given below;

• Companies Act, 2013 has become effective from 1^st April 2014. A new clause has been introduced in Section 196(3). By virtue of that, additional disqualification has been added to the disqualifications for MD., viz., Director cannot be appointed as MD or MD cannot continue the office of MD after he has attained the age of 70 years unless he is appointed by the shareholders by passing special resolution.
• Prior to this, Respondent No.2 on 01^st August 2012 was re-appointed as Chairman cum Managing Director of Respondent No.1 for a period of further five years till 2017.
• Now, the Question for consideration is that whether after the introduction of new provision in  Companies Act,2013, any MD who was appointed prior to Companies Act, 2013 becoming effective, would have right to continue to act as MD after attaining age of 70 years without special resolution being passed by the Company in its General Meeting?
•  The legislative intent in introducing Section 196(3) is quiet clear and the language is plain, simple and unambiguous. The Section does not make any distinction between the MDs who have appointed before 01/04/2014 and those after 01/04/2014.
• The disqualifications which have been mentioned are introduced as a matter of public policy and they contain mandatory prohibition/bar for continuing the MD in employment once he attained the age of 70 years
• The Court held that by virtue of the Companies Act of 2013, one additional disqualification was added to the list of disqualifications which were in existence under the old Act under Section 267. Since a new Clause was added as further disqualification for appointment or continuation as MD of the Company it would operate not only at the stage of appointment but also would operate in the case of person who has already appointed and attained the age of 70 years and such as person, therefore by virtue of disqualification, had no right to be continued as MD by operation of Statute unless a Special Resolution was passed by the Company.

‘Omnibus Approval’ under the Companies Act, 2013

The Ministry of Corporate Affairs had vide Notification dated 14^th December, 2015 amended the Companies (Meetings of Board and its Powers) Rules, 2014so as to prescribe the conditions for Omnibus Approval for related party transactions on annual basis. Earlier in the year on 25^th May, 2015, the Central Government had vide Companies (Amendment) Act, 2015 amended the Companies Act, 2013 and had expressly empowered Audit Committee of prescribed classes of Public Companies to grant omnibus approval for related party transactions proposed to be entered into by the subject to such conditions as may be prescribed.

As per Section 177 read with Rule 6 of Companies (Meetings of Board and its Powers) Rules, 2014 following classes of companies needs to constitute an Audit Committee:

(1)   Listed Company

(2)   Public Companies with a paid up capital of Rs. 10 Crore or more

(3)   Public Companies having a turnover of Rs. 100 Crore or more

(4) Public Companies having in aggregate outstanding loans or borrowings or debentures or deposits exceeding Rs. 50 Crore or more

Listed Companies already have similar conditions in SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.The comparative of both the statutes goes as follows:

Sr. No.	Particulars	LODR	Companies Act, 2013
(1)	Authority to approve Criteria for making omnibus approval	Audit Committee	Audit Committee + Board of Directors
(2)	Criteria	Shall be in line with RPT policy of the Company	Lays down minimum (5) criteria
(3)	Review of approved Omnibus RPT by Audit Committee	Quarterly basis	At such intervals as the Audit Committee may deem fit
(4)	Validity of Omnibus approved RPT	One year	One Financial Year
(5)	Prohibited transactions via Omnibus approval	No such prohibition	Selling and disposing of the undertaking of the Company.
(6)	General Exemption	Transactions between Hold. Co. and WOS whose accounts are consolidated with Hold Co. AND placed before the shareholders for their approval	No such exemption available

Needless to say, Inc.is expected to be professionals to match up the pace of the changing regulations. Accordingly, illustratively, Listed Companies shall check (i) whether the criteria laid down by their Audit Committee has been approved by the Board?; (ii) whether the criteria adopted by the Audit Committee covers minimum criteria laid down under Companies Act, 2013; (iii) whether the omnibus approvals made by the Audit Committee are still valid or are due to expire shortly?. On a similar line unlisted Public Companies need to start from the scratch and ensure compliance with the new Rule on Omnibus approvals.

SCHEME OF MERGER: ACCOUNTING METHODS AND TREATMENT OF RESERVES THEREON

The accounting treatments being followed in the scheme of merger and the treatment to reserves becomes essential because it affects either the reserves of the Company or adds on to the intangible property [goodwill]. While, payments for goodwill can be amortised over a period of years; an addition to reserves may prove difficult to deal with. Under the purchase method of merger, Companies end up having goodwill or capital reserves in exchange of consideration for merger. However, it seems that under the pooling interest method, the said difference could be either debited or credited to any of the reserves as the wordings are as follows [1]“The difference between the amount recorded as share capital issued (plus any additional consideration in the form of cash or other assets) and the amount of share capital of the transferor company should be adjusted in reserves.”

The accounting principles (as per AS-14) to be followed while considering the merger of two or more Companies lay down two accounting methods for amalgamations:

·         Amalgamation in the nature of Merger (Pooling of interest method)

·         Amalgamation in the nature of Purchase (Purchase method)

Pooling of interest method is the one where there happens a genuine pooling of not only assets and liabilities but also the stakeholder’s interest and the business wherein certain conditions needs to be followed. Whereas, amalgamation not fulfilling any of the conditions of pooling interest method, falls under the method of purchase.

Key point to be discussed here is the treatment of difference in the consideration paid in the amalgamation and the value of net identifiable assets acquired.       

When this pooling of interest method is applicable, as per the text of AS 14, the difference is required to be transferred to the “Reserves”. However, there being no specific mention about nature of reserves, it is widely interpreted and practiced to be transferred to general reserves or share premium account also; as the said reserves can be akin to the premium on shares.      

In case of Sutlej Industries Ltd it was held by the Rajasthan High Court that in case any reserve arose by amalgamation/arrangement it would be treated as free reserve for distribution to shareholders and since, utilization of arrangement/amalgamation reserve for distribution to shareholders was not objected to by the shareholders and the scheme was approved unanimously in the meeting of the shareholders, there was no reason to exclude that clause from the proposed scheme.

However, in recent past it has been observed that High courts on the basis of objections raised by respective Regional directors have been insisting on transfer of difference to capital reserves only. Opinion of ICAI-Expert Advisory committee also favours transfer to capital reserve as the reserve created out of such transactions (Amalgamation) are of the capital nature. These contentions seem to have supported by the requirement that the amalgamation reserves are not supposed to be free reserves available for distribution of dividend.

In this context, looking at the various schemes of mergers approved by the respective High Courts; it seems that the traditionally transfer to capital reserves is the ideal step to go ahead with. However, wordings of the AS 14 issued by ICAI stating about the transfer of difference to merely “Reserves” remains ambiguous.

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[1] Accounting Standard 14 issued by ICAI

Amendments in FEMA Regulations

The Reserve Bank of India (RBI) has reviewed various former regulations issued by it in the year 2000.

Various amendments have followed subsequently and where it has found necessary, RBI has notified new regulations replacing the earlier regulations.

The following regulations have been repealed and replaced by the new regulations:

Regulations Repealed	Regulations Notified
Foreign Exchange Management (Possession and Retention of Foreign Currency) Regulations, 2000	Foreign Exchange Management (Possession and Retention of Foreign Currency) Regulations, 2015
Foreign Exchange Management (Realisation, repatriation and surrender of foreign exchange) Regulations, 2000	Foreign Exchange Management (Realisation, repatriation and surrender of foreign exchange) Regulations, 2015
Foreign Exchange Management (Export and Import of Currency) Regulations, 2000	Foreign Exchange Management (Export and Import of Currency) Regulations, 2015
Foreign Exchange Management (Foreign Currency Accounts by a person resident in India) Regulations, 2000	Foreign Exchange Management (Foreign Currency Accounts by a person resident in India) Regulations, 2015
Foreign Exchange Management (Acquisition and Transfer of Immovable Property outside India) Regulations, 2000	Foreign Exchange Management (Acquisition and Transfer of Immovable Property outside India) Regulations, 2015

RBI's Regulatory Relaxations for Start-up

The Reserve Bank of India (RBI) has vide its sixth bi-monthly Monetary Policy Statement, 2015-16 on February 02, 2016 with reference to the Government's Start-up India initiative decided to take steps to ease the doing of business in India. A detailed statement has been issued separately by the RBI vide press release dated 2 February 2016.

The following regulatory changes for easing the cross-border transactions, particularly relating to the operations of the start-up enterprises are proposed to be made, in consultation with the Government of India:

1. Enabling start-up enterprises, irrespective of the sector in which they are engaged, to receive foreign venture capital investment and also explicitly enabling transfer of shares from Foreign Venture Capital Investors to other residents or non-residents investors;
2. Permitting, in case of transfer of ownership of a start-up enterprises, receipt of the consideration amount on a deferred basis as also enabling escrow arrangement or indemnity arrangement up to a period of 18 months;
3. Enabling online submission of A2 forms for outward remittances on the basis of the form alone or with document(s) upload/submission, depending on the nature of remittance;
4. Simplifying the process for dealing with delayed reporting of Foreign Direct Investment (FDI) related transaction by building a penalty structure into the regulations itself.
5. Permitting start-up enterprises to access rupee loans under External Commercial Borrowing (ECB) framework with relaxations in respect of eligible lenders, etc.;
6. Issuance of innovative FDI instruments like convertible notes by start-up enterprises; and
7. Streamlining of overseas investment operations for the start-up enterprises

The notications/circulars under Foreign Exchange Management Act (FEMA), wherever necessary, will be issued shortly.

Certain other issues that are permissible under the existing regime shall be claried

1. Issue of shares without cash payment through sweat equity or against any legitimate payment owed by the company remittance of which does not require any permission under FEMA; and
2. Collection of payments by start-up enterprises on behalf of their subsidiaries abroad

Further, electronic reporting of investment and subsequent transactions will be made on e-Biz platform only. 

Submission of physical forms will be discontinued with effect from February 8, 2016.

Mandatory Reporting under FDI Scheme on e-Biz platform

The Reserve Bank of India (RBI) vide RBI/2015-16/303 A.P. (DIR Series) Circular No. 40 on 01 February 2016, with a view to promoting the ease of reporting of transactions related to Foreign Direct Investment, under the agency of “E-biz” project of the Government of India has enabled online filing of the following:

1. Advance Remittance Form (ARF) which is used by the companies to report the FDI inflows to RBI
2. FC-GPR Form which a company submits to RBI for reporting the issue of eligible instruments to the overseas investor against the above mentioned FDI inflow; and
3. FC-TRS Form which is submitted to RBI for transfer of securities between resident and person outside India.

At present both the options, i.e. online filing and physical filing of abovementioned forms, are available to the users.

It has been decided that from February 8, 2016 the physical filing of forms ARF, FC-GPR and FC-TRS will be discontinued and forms submitted in online mode only through e-Biz portal will be accepted.