Important changes in Private placement of Securities

Ministry of Corporate Affairs (MCA) has vide notification dated 7 August 2018 notified section 10 of Companies (Amendment) Act, 2017.  Pursuant to this notification, revised section 42 of the Companies Act, 2013 has been made effective.  Section 42 of the Companies Act, 2013, deals with the offer and allotment of securities through Private Placement.

Furthermore, the rules for private placement are also amended.  The key highlights of the amendment are as follows:

1. If the Company has taken the shareholders’ approval u/s 180(1)(c) of the Act and if it’s within the limits, separate shareholders’ approval is not required for issuing Non-convertible debentures. Further, if the proposed amount of the offer is within the limits of sec 180(1)(c) Board resolution would be adequate
2. Private Placement offer letter cannot be circulated till Board Resolution/Special Resolution is filed with ROC
3. Private Placement offer letter (Form PAS-4) is not required to be filed with ROC
4. Offer or invitation to subscribe or issue of securities is to be made to a select group of persons which are identified by the Board (identified persons).
5. Right of Renunciation is prohibited
6. The limit of the minimum size of investment in the offer of securities of Rs. 20,000 (Rupees Twenty thousand) is removed
7. Return of allotment (Form PAS-3) is to be filed with RoC within 15 (fifteen) days instead of 30 (thirty) days from the date of the allotment
8. Company cannot utilize monies raised through private placement till the return of allotment is filed with Registrar of Companies (RoC)
9. In case of default in filing return of allotment = Company, its Promoters and Directors shall be liable to a penalty of  Rs. 1,000/- (Rupees one thousand) for each day during which such default continues but not exceeding Rs. 25,00,000/- (Rupees twenty-five lakhs)
10. If an offer is made or monies are accepted in contravention of the provisions of  this section- Company, its Promoters and Directors shall be liable for a penalty which may extend to the amount raised through the private placement or Rs, 2,00,00,000/- (Rupees two crore), whichever is lower (Earlier it was whichever is higher)
11. Any offer/invitation/issue of securities through private placement exceeding 50 identified person or more   shall be treated as a public offer and all the provisions of the Act and the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992 shall become applicable 

Write-off of unrealized export bills

Reserve Bank of India (RBI) vide Section 7 of Foreign exchange Management Act (FEMA), 1999 read with Export Regulations, 2016 regulates the export of goods and services. There are certain cases wherein exporters are unable to realize their outstanding export receivables.

Following are the provisions specified in the regulations for writing off such outstanding export receivables:

1. An exporter who has not been able to realize the outstanding export dues despite best efforts, may either :     

·               Self-write off or

·         Approach the AD Category – I banks who had handled the relevant       shipping documents      

2.                   The limits prescribed for write-offs of unrealized export bills are as under:

Type	Rate
Self “write-off” by an exporter (Other than Status Holder Exporter)	5%*
Self “write-off” by Status Holder Exporters	10%*
Write-off” by Authorized Dealer Bank	10%*

   
 *of the total export proceeds realized during the previous calendar year

3.       The above write-off will be subject to conditions that the relevant amount has remained outstanding for more than one year, satisfactory documentary evidence is furnished in support of the exporter having made all efforts to realize the dues, and the case falls under any of the under noted categories: 

•   The overseas buyer has been declared insolvent and a    certificate from the official liquidator indicating that there is no possibility of recovery of export proceeds has been produced. 

·        The overseas buyer is not traceable over a reasonably long period of time. 

·     The goods exported have been auctioned or destroyed by the Port /  Customs / Health authorities in the importing country.

·    The unrealized amount represents the balance due in a case settled through the intervention of the Indian Embassy, Foreign Chamber of Commerce or similar Organization; 

·       The unrealized amount represents the undrawn balance of an export bill (not exceeding 10% of the invoice value) remaining outstanding and turned out to be unrealizable despite all efforts made by the exporter;

·   The cost of resorting to legal action would be disproportionate to the unrealized amount of the export bill or where the exporter even after winning the Court case against the overseas buyer could not execute the Court decree due to reasons beyond his control; 

·       Bills were drawn for the difference between the letter of credit value and actual export value or between the provisional and the actual freight charges but the amounts have remained unrealized consequent on dishonor of the bills by the overseas buyer and there are no prospects of realization.

4.        The exporter must surrender proportionate export incentives if any, availed of in  respect of the relative shipments. 

5.        In case of self-write-off, the exporter should submit to the concerned AD bank, a Chartered Accountant’s certificate (indicating the export realization in the preceding calendar year, amount of write-off already availed of during the year, export benefits availed of by the exporter which have been surrendered, relevant EDF to be written off, Bill No., invoice value, commodity exported, country of export). 

However, the following would not qualify for the write off facility:

·           Exports made to countries with externalization problem

·    EDF which are under investigation by agencies like, Enforcement Directorate,   Directorate of Revenue Intelligence, Central Bureau of Investigation, etc. as also the outstanding bills which are subject matter of civil / criminal suit.

Cases not covered by the above instructions / beyond the above limits, may be referred to the concerned Regional Office of Reserve Bank of India.

SEBI ordered refund of Money in case of allotment of Equity Shares to more than 49 investors in a financial year

Parties

1. Rising Agrotech Limited (herein after referred to as 'RAL’)
Promoters and Directors

2. Siddharth Kayal

3. Sushovan Roy

4. Bikas Bhandary

5. Santosh Kumar Dwivedi

6. Dipan Kumar Sen

7. Binay Kumar Shaw

8. Lina Kayal,

9. Awdhesh Kumar Singh

10. Amresh Pandey

The above parties shall hereinafter referred to as ‘Noticees’

Issues

1. Whether the offer and issuance of equity shares by RAL to 530 investors during the financial year 2010-11 and 930 investors during the financial year 2011-12 was a public issue?
2. Why direction to refund the money collected through the issue of equity shares to the public along with interest and other appropriate directions be not passed against the Noticees?

Contravention - provisions of sections 56, 60 and 73 of the Companies Act, 1956 and Regulation 4 (2) (d), 5, 6, 7, 25 and 26 36 ,37, 46, 47 57 SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR Regulations).

Facts of the Case

• RAL was incorporated on 13 July, 2010 ROC, Kolkata. Noticee Nos. 2-10 were/are the Directors of the Company. As per the return of allotment (E-Form 2), the Company had raised an amount of Rs. 108.09 lakh from 1460 investors during the Financial Year 2010-11 and 2011-12 as follows

Financial Year	No. of Shares allotted	Number of Investors
2010-2011	4,73,283	530
2011-2012	7,80,750	1,180

• An interim order was served on all the Noticees refraining the Noticees from mobilizing the funds from the public, to which all Directors replied except Mr. Siddhartha Kayal.
• 
  
• Following were the replies received from each of the Director:

• Dipan Kumar Sen- Not involved in any activity of the Company other than looking after agricultural projects of the Company.
• Bikash Bhandary – Appointed to fill in the casual vacancy created by the resignation of Lina Kayal.
• Santosh Dwivedi – Resigned from the position of Director and not involved in any activity of the Company.
• Awadesh Kumar Singh – Same as Santosh Dwivedi
• Amaresh Pandey - Same as Santosh Dwivedi
• Binay Shaw - Same as Santosh Dwivedi
• Lina Kaya – Not involved in the activity of the Company other than opening of Bank Account
• Sushovan Roy – Never participated in the activity of the Company    
• An opportunity of being heard was granted to which no one appeared. However, Awadhesh Kumar Singh, Bikash Bhandary, Binay Shaw, Amaresh Pandey and Santosh Kumar Dwivedi requested an opportunity of hearing at Kolkata. It was submitted that Awadhesh Kumar Singh, Binay Shaw, Amaresh Pandey and Santosh Kumar Dwivedi joined the Company at the instance of Siddharth Kayal who was known to them. However, as there was no clear picture on how the Company would be functioning they resigned in August 2010. Letters of resignation by the aforesaid Director and received by the Company were furnished. Since the Company did not get the ROC records updated regarding the resignations, they again submitted their resignation in November 2010 which was filed with ROC on   7 December 2010. It was also stated that they have not attended any Board Meeting or participated in any activity of the Company. 

The basis of the Judgement

• In terms of the first proviso to section 67(3) states that an offer of shares or debentures made to fifty persons or more would constitute an offer to the public. The company issued and allotted equity shares to 530 investors during the financial year 2010-11 and 930 investors during the financial year 2011-12 and the total amount mobilized by the company by allotment of equity shares was Rs.108.09 lakh. The number of investors to whom equity shares were allotted in each allotment during the financial year 2010-11 and 2011-12 is in excess of 49. Thus, the offer and allotment of equity shares by RAL on different occasions was a public issue.
• It was obligatory on the part of RAL to list such securities on at least one stock exchange in compliance with the provisions of `section 73. In the absence of any such application to the stock exchange for seeking listing permission, the noticees are required to repay with interest all money received from the applicants pursuant to section 73 (1) and 73 (2). No material or record is available to indicate that RAL has made any such application seeking listing permission. There is also the violation of ICDR regulations as the public issue is ought to be made in compliance with ICDR Regulations.
• Further, the amount is to be refunded within 8 days in case of any delay in refund beyond eight days, the company and every director of the company who is an officer in default shall, on and from the expiry of the eighth day, be jointly and severally liable to repay that money with interest at such rate being not less than four per cent and not more than fifteen per cent, as may be prescribed, having regard to the length of the period of delay in making the repayment of such money.
• As no steps have been taken by the company and its directors to make refund despite the interim order, the officer is of the view that refund is to be affected with interest at the rate of 15% per annum. Accordingly, Noticee nos. 1, 2 and 5-10 (directors at the time of issue and allotment) are jointly and severally liable to refund the principal amount along with 15% interest per annum calculated from the date of deposit with the company till the date of refund.
• Noticee Nos. 5,7, 9, 10 have stated that they resigned from the Company in August 2010 i.e. before the allotment of shares to the public on 16 November 2010. Further, it was observed that the subsequent resignation letters which were filed by the Company with ROC, doesn’t make a reference of the earlier resignation claimed to have been given by these Directors and hence the arguments made by these Directors were not taken to be credible.
• It was noted that Noticee Nos. 3 & 4 were present Directors of the Company, they were not the Directors of the Company when the equity shares of the Company were issued and allotted.

Order

After considering the facts and circumstance of the case following orders were issued by adjudicating officer:

• Rising Agrotech Ltd. and its directors at the time of issue and allotment shall forthwith refund the money to the investors, with an interest of 15% per annum (the interest is calculated from the date when the repayments became due till the date of actual payment.
• The refund shall be made through banking channels.
• Within three months of completion of refund as directed above, the Noticees shall file a certificate of such completion with SEBI from two independent Chartered Accountants after proper verification of the details of such refunds from records including bank accounts of the Noticees and after being satisfied that the refund has actually been made
• Till the refund, as directed above, is completed and for a period of four years from the date of completion of the refund, Rising Agrotech Ltd. and its directors at the time of issue and allotment are hereby–

(a) restrained from accessing the securities market;
(b) prohibited from buying, selling or otherwise dealing in securities in any manner whatsoever, directly or indirectly; and
(c) restrained from associating themselves, with any listed public company or any public company which intends to raise money from the public.

• The present directors are directed not to, directly or indirectly, access the securities market and are further restrained and prohibited from buying, selling or otherwise dealing in the securities market, directly or indirectly in whatsoever manner for a period of three months from the date of this Order. They are also restrained from associating themselves with any listed public company and any public company which intends to raise money from the public, or any intermediary registered with SEBI for a period of three months from the date of this order.

Reporting FDI to Reserve Bank of India since inception till date in FIRMS

All are aware that as per the RBI/2017-18/194 A.P (DIR Series) Circular No.30 dated 7 June 2018, Indian Entities are required to input their existing Foreign Investment including Indirect Foreign Investment in FIRMS by 20 July 2018.

Everyone can identify Direct Foreign Investment by looking at their shareholder's list and the other KYC Details.

The questions which can come into one’s mind are:-

Which entities are covered in “Indian Entities”?

As per Master Direction on FDI updated as of 4 January 2018,

Indian Entity:-

2.11 ‘Indian entity’ is an Indian company or an LLP.

What is the “Indirect Foreign Investment”?

As per Master Direction on FDI updated as of 4 January 2018, 

Indirect Foreign Investment:-

9.1.15 ‘Indirect Foreign Investment’ is downstream investment received by an Indian entity from:

·       another Indian entity (IE) which has received foreign investment and which is not owned and not controlled by resident Indian citizens or is owned or controlled by persons resident outside India;

or

·       an investment vehicle whose sponsor or manager or investment manager is not owned and not controlled by resident Indian citizens or is owned or controlled by persons resident outside India

"The critical aspect will be determining “owned or controlled by persons resident outside India”. 

What if the Indian Entity has not reported FDI to RBI when it was received?

Entities shall provide data with respect to all foreign investments received, irrespective of the fact that the regulatory reporting to the Reserve Bank of India for the same has been made or not and whether the same has been acknowledged or not.

What are the Consequences of Non-Reporting of FDI to RBI in FIRMS?

Indian entities will not be able to receive foreign investment (including indirect foreign investment) and will be treated as non-compliant with Foreign Exchange Management Act, 1999 (FEMA) and regulations made thereunder and liable for action as laid in FEMA or the regulations made thereunder.

What is the Penalty for contravention under FEMA? 

Penalties – (prescribed under Sec.13)

Up to thrice the sum involved in such contravention where such amount is quantifiable OR 

up to two lakh rupees where the amount is not quantifiable AND

where such contravention is a continuing one, further penalty which may extend to five thousand rupees for every day after the first day during which the contravention continues. 

Significant Beneficial Ownership Disclosure-who needs to comply?

Introduction: 

Section 90 of Companies Act, 2013 (the Act) is amended by the Companies (Amendment) Act, 2017 as the “Register of significant beneficial owners in a company”. The amended section and rules made thereunder are effective from 13^th June, 2018.

Pursuant to the provisions of this section, individuals who acting alone or together, or through one or more persons or trust, including a trust and persons resident outside India holding beneficial interest of not less than 10% shares of a company or right to exercise or the actual exercising of significant influence or control, are required to give declaration to the Company specifying the nature of interest (referred as “significant beneficial owner”). Once the declaration is received by the Company from significant beneficial owner, the Company is required to file return a return of significant beneficial owners of the company with Registrar of Companies.

Which individuals are required to give declaration?

Every individual, who acting alone or together, or through one or more persons or trust, including a trust and persons resident outside India who fulfills either of the following conditions are required to give declaration u/s 90(1) of the Act

·         holding beneficial interest of not less than 10%  shares of a company OR

·         having rights to exercise of significant influence or control OR

·         actual exercising of significant influence or control

Let’s understand the meaning of these terms:

Definition of Beneficial Interest:

Beneficial Interest is defined u/s 89(10) of the Act as: “Beneficial Interest” in a share includes, directly or indirectly, through any contract, arrangement or otherwise, the right or entitlement of a person alone or together with any other person to—

·         exercise or cause to be exercised any or all of the rights attached to such share; or 

·         receive or participate in any dividend or other distribution in respect of such share

Definition of Control:

Control is defined u/s 2(27) of the Act as "control" shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.

Definition of Significant Influence:

Significant influence is not defined in the Act. However, explanation is provided in the definition of associate company u/s 2(6) of the Act for the purpose of that clause. It states that the expression "significant influence" means control of at least twenty per cent (20%) of total voting power, or control of or participation in business decisions under an agreement  

Concluding Remarks:

It is imperative to note that the definition of beneficial interest and control are inclusive definitions. Unless the individual who acting alone or together, or through one or more persons or trust, including a trust and persons resident outside India fits in either of the criteria viz.,  

·         holding beneficial interest of not less than 10%  shares of a company OR

·         having rights to exercise of significant influence or control OR

·         actual exercising of significant influence or control

are not required to give declaration u/s 90(1) of the Act. If the individual fits in either of criteria as mentioned above, whether the individual is significant beneficial owner or not is subjective in nature.   

FIRMS Application

Reserve Bank of India (RBI) vide notification dated June 27, 2018 have introduced an online application i.e., FIRMS (Foreign Investment Reporting and Management System), which would provide the data for the Single Master Form (SMF)

Glimpse of the FIRMS application is as under:

·                               1^st Phase

 In the first phase, the Entity Master is required to be created with RBI wherein Entities are required to provide data with respect to all foreign investments received from incorporation onwards (including transfer from resident to nonresident and vice versa), irrespective of the fact that the regulatory reporting to the RBI for the same has been made or not and whether the same has been acknowledged or not. Due date for providing details to RBI for Entity Master is July 12, 2018.

Indian entities not complying with these instructions will not be able to receive foreign investment (including indirect foreign investment) and will be treated as non-compliant with Foreign Exchange Management Act, 1999 (FEMA)

                2^nd Phase-

In the second phase, Form SMF would be introduced which would be available from August 1 2018. Form SMF would consist of 9 reports namely FC-GPR, FC-TRS, LLP-I, LLP-II, ESOP, DRR, CN, Form DI (reporting of indirect foreign investment), Form InVi (inflows in investment vehicles).

           

If Business advance received from a Company is not appropriated for either supply of goods or providing services within 365 days, will it be treated as a Deposit? 

Introduction:

Deposit is defined u/s 2(31) of the Companies Act, 2013 (the ‘Act’) which states that "deposit" includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India. Any money falling under prescribed 18 categories prescribed in rules are not considered as deposit.

The question which we are discussing in this article is as follows:

Amount received by the Company from another Company as business advance for the purpose of either supply of goods or provided services; not appropriated for the purpose within 365 days from the date of acceptance of such advance – will that amount be treated as deposits? 

For the purpose of this question, following provisions are important

Rule 2(c) of Companies (Acceptance of Deposit) Rules, 2014 defines deposit as-

Deposit" includes any receipt of money by way of deposit or loan or in any other form, by a company, but does not include – …

(vi) any amount received by a company from any other company; …

(xii) any amount received in the course of, or for the purposes of, the business of the company,-

(a) as an advance for the supply of goods or provision of services accounted for in any manner whatsoever provided that such advance is appropriated against supply of goods or provision of services within a period of three hundred and sixty five days from the date of acceptance of such advance:

Provided that in case of any advance which is subject matter of any legal proceedings before any court of law, the said time limit of three hundred and sixty five days shall not apply: …

Analysis:

Now the question is

1.      Whether the money received by the Company is from another Company? – Yes

2.       

(a)    Whether the money received by the Company is from another Company as business advance? – Yes

(b)   Whether the money received by the Company is from another Company as business advance is appropriated for the purpose of either supply of goods or provided services within 365 days from the date of acceptance of such advance? No

It is imperative to note that the condition mentioned under sub-clause (vi) is fully complied whereas the condition mentioned under sub-clause (xii) is half complied.

Out of the 18 categories, none of exclusions states that if conditions are not complied money received will be considered as deposit except under sub-clause (vii) viz., if the allotment is not made within 60 days from the date of share application money received, it will be considered as deposit.  

Conclusions:

If the money is received in full compliance of either under rule 2(c)(vi) or rule 2(c)(xii), then that money gets exempted from the definition of deposit.

Thus, any money received by a company from another company, regardless of the purpose it will be covered under rule 2(c)(vi) and will not be considered as deposit even if it falls under other categories of exclusions prescribed in rules.