Meaning of “total share capital” for the purpose of definition of “subsidiary company” [Ref: Section 2(87) and Companies Specification of definitions details) Rules, 2014]
As per section 2(87), a “subsidiary company” or “subsidiary”, in relation to any other company (i.e. a holding company), is defined to mean a company in which the holding company i. controls the composition of the Board of Directors; or ii. exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies.
The term “total share capital” is defined to mean the aggregate of paid up share capital and convertible preference share capital.
Implication
Under Companies Act, 1956 where if a company held more than ½ of the total equity share capital (i.e. shares with voting rights and not preference share capital) of another company, the relationship of holding and subsidiary company came into existence. However under Companies Act, 2013, holding of even convertible preference share capital is counted for the purpose of establishing such relationship.
Inclusion of director or KMP of the holding company or his relative [Ref: Section 2(76) and Companies Specification of definitions details) Rules, 2014]
As per Companies Specification of definitions details) Rules, 2014, a director or a KMP of the holding company or his relative is also considered to be a related party with reference to a company. As per the said Rules, a person shall be deemed to be the relative of another, if he or she is related to another in the following manner, namely:- (1) Father & step-father. (2) Mother & step-mother. (3) Son & step-son. (4) Son’s wife. (5) Daughter. (6) Daughter’s husband. (7) Brother & step-brother; (8) Sister & step-sister.
Change of name not allowed in certain cases [Ref: Companies Incorporation Rules, 2014]
If a company has defaulted in filing its annual returns or financial statements or any document due for filing with the Registrar or if a company has defaulted in repayment of matured deposits or debentures or interest on deposits or debentures, it cannot change its name.
Shifting of registered office from one state to another [Ref: Section 13]
Under Companies Act, 1956, shifting of registered office from one state to another could be done for purposes only as specified under the Act. However, under Companies Act, 2013, such restriction has been done away with. Under Companies Act, 2013, Central Government is required to dispose off the application for shifting within 60 days, unlike the 1956 Act which did not have such time limit. Under the 1956 Act, if the certified copy of order confirming alteration of memorandum was not filed with the Registrar of State from which office is shifted and also to which the office is shifted within the prescribed time, the shifting would become void, unless sufficient is shown with application is made within further period of 1 month. Under the 2013 Act, no such time limit is specified; however till the documents are filed, alteration will not take place.
Special conditions for issue of equity shares with differential rights [Ref: Companies Share Capital & Debentures) Rules, 2014]
Issue of equity shares with differential rights as to dividend, voting or otherwise is subjected to various conditions as specified under the said rules, which inter alia require compliance with the following prerequisites as mentioned here under: i. the company needs to have consistent track record of distributable profits for the last 3 (three) years; ii. the company has not defaulted in filing financial statements and annual returns for 3 (three) financial years immediately preceding the financial year in which it is decided to issue such shares; iii. the company has no subsisting default in the payment of a declared dividend to its shareholders or repayment of its matured deposits or redemption of its preference shares or debentures that have become due for redemption or payment of interest on such deposits or debentures or payment of dividend; iv. the company has not defaulted in payment of the dividend on preference shares or repayment of any term loan from a public financial institution or State level financial institution or scheduled Bank that has become repayable or interest payable thereon or dues with respect to statutory payments relating to its employees to any authority or default in crediting the amount in Investor Education and Protection Fund to the Central Government; and v. the company has not been penalized by Court or Tribunal during the last 3 (three) years of any offence under the Reserve Bank of India Act, 1934, the Securities and Exchange Board of India Act, 1992, the Securities Contracts Regulation Act, 1956, the Foreign Exchange Management Act, 1999 or any other special Act, under which such companies being regulated by sectoral regulators.
Prohibition of issue of shares at a discount [Ref: Section 53]
Unlike Companies Act, 1956, there is a blanket prohibition on issuing shares at a discount, except issue of sweat equity shares as mentioned below.
Issue of sweat equity shares [Ref: Section 54 & Companies Share Capital & Debentures) Rules, 2014]
As per Companies Share Capital & Debentures) Rules, 2014, an unlisted company cannot issue sweat equity shares to its directors or “employees” at a discount or for consideration other than cash, for their providing know- how or making available rights in the nature of intellectual property rights or “value additions”, by whatever name called, unless the issue is authorised by a special resolution passed by the company in general meeting.
As per the rules the expression ‘‘Employee’’ means- (a) a permanent employee of the company who has been working in India or outside India, for at least last 1 (one) year; or (b) a director of the company, whether a whole time director or not; or (c) an employee or a director as defined in sub-clauses (a) or (b) above of a subsidiary, in India or outside India, or of a holding company of the company;
As per the rules, the expression “Value additions” means actual or anticipated economic benefits derived or to be derived by the company from an expert or a professional for providing know-how or making available rights in the nature of intellectual property rights, by such person to whom sweat equity is being issued for which the consideration is not paid or included in the normal remuneration payable under the contract of employment, in the case of an employee.
The rules also inter alia mention that:
i. the sweat equity shares issued to directors or employees shall be locked in/non transferable for a period of 3 (three) years from the date of allotment; ii. the sweat equity shares to be issued shall be valued at a price determined by a registered valuer as the fair price giving justification for such valuation; iii. the valuation of intellectual property rights or of know how or value additions for which sweat equity shares are to be issued, shall be carried out by a registered valuer, who shall provide a proper report addressed to the Board of directors with justification for such valuation; and iv. the amount of sweat equity shares issued shall be treated as part of managerial remuneration if the sweat equity shares are issued to any director or manager and they are issued for consideration other than cash, which does not take the form of an asset which can be carried to the balance sheet of the company in accordance with the applicable accounting standards;
The Directors’ Report is required to disclose the details of the issue as prescribed under the rules and also a separate register of sweat equity shares in the prescribed form is required to be maintained.
Issue and redemption of preference shares [Ref: Section 55 & Companies Share Capital & Debentures) Rules, 2014]
Unlike Companies Act, 1956, issue of preference shares by a company requires authorisation by way of a special resolution. The rules prescribed the conditions on which the issue can be made which inter alia require compliance with the following prerequisites:
(i) the company, at the time of such issue of preference shares, has no subsisting default in the redemption of preference shares issued either before or after the commencement of the 2013 Act or in payment of dividend due on any preference shares; ii. certain particulars as mentioned under the rules are required to be set out in the resolution relating to issue of preference shares which inter alia include priority with respect to payment of dividend or repayment of capital vis-à-vis equity shares, participation in surplus funds / assets / profits, conversion, redemption etc. iii. explanatory statement annexed to the notice of the general meeting to provide complete material facts concerned with and relevant to the issue of such shares inter alia including prescribed objective of such issue, basis on which price is arrived at, redemption terms, manner and mode of redemption, expected dilution on share capital upon conversion. iv. the Register of Members maintained must contain the particulars in respect of such preference share holder(s). v. a company may redeem its preference shares only on the terms on which they were issued or as varied after due approval of preference shareholders and the preference shares may be redeemed:- (a) at a fixed time or on the happening of a particular event; (b) any time at the company’s option; or (c) any time at the shareholder’s option.
A company engaged in the setting up and dealing with of infrastructural projects may issue preference shares for a period exceeding 20 (twenty) years but not exceeding 30 (thirty) years, subject to the redemption of a minimum 10 (ten) percent of such preference shares per year from the twenty first year onwards or earlier, on proportionate basis, at the option of the preference shareholders.
Issue of ESOPs [Ref: Companies Share Capital & Debentures) Rules, 2014]
An unlisted company proposing to issue shares to employees under an Employee Stock Option Scheme is required to comply with various conditions as specified under the said rules which inter alia include the following: i. the issue of ESOPs has been approved by the shareholders of the company by passing a special resolution; ii. Detail disclosures (as prescribed in the rules) to be made in the explanatory statement annexed to the notice for passing the resolution which inter alia includes the appraisal process for determining the eligibility of employees to the ESOP, maximum number of options to be granted, identification of classes of employees entitled to participate in the Scheme, requirements of vesting, process of exercise, method for valuation, conditions under which the options may lapse etc. iii. The approval of shareholders by way of separate resolution will be required in case of- (a) grant of option to employees of subsidiary or holding company; or (b) grant of option to identified employees, during any one year, equal to or exceeding 1 (one) percent of the issued capital (excluding outstanding warrants and conversions) of the company at the time of grant of option. iv. The company may by special resolution, vary the terms of Employees Stock Option Scheme not yet exercised by the employees provided such variation is not prejudicial to the interests of the option holders. v. There shall be a minimum period of 1 (one) year between the grant of options and vesting of option. vi. The amount, if any, payable by the employees, at the time of grant of option- (a) may be forfeited by the company if the option is not exercised by the employees within the exercise period; or (b) the amount may be refunded to the employees if the options are not vested due to non-fulfillment of conditions relating to vesting of option as per the Employees Stock Option Scheme. vii. The option granted to employees shall not be transferable to any other person. viii. The option granted to the employees shall not be pledged, hypothecated, mortgaged or otherwise encumbered or alienated in any other manner. ix. In the event of the death of employee while in employment, all the options granted to him till such date will vest in the legal heirs or nominees of the deceased employee. x. In case the employee suffers a permanent incapacity while in employment, all the options granted to him as on the date of permanent incapacitation, will vest in him on that day. xi. In the event of resignation or termination of employment, all options not vested in the employee as on that day shall expire. However, the employee can exercise the options granted to him which are vested within the specified period subject to the terms and conditions under the scheme granting such options as approved by the Board. xii. Detailed disclosures (as prescribed under the rules) required to be made under the Directors’ Report which inter alia include options granted, vested, exercised, lapsed, exercise price, variation of terms of options, money realised by exercise of options, employee wise details of options granted to KMP, any other employee who receives a grant of options in any one year of option amounting to 5% (five percent) or more of options granted during that year, identified employees who were granted option, during any one year, equal to or exceeding 1% (one percent) of the issued capital (excluding outstanding warrants and conversions) of the company at the time of grant etc. xiii. The company required to maintain a Register of Employee Stock Options in the format prescribed under the Rules.
Issue of shares on preferential basis (Ref: Section 62 and Companies Share Capital & Debentures) Rules, 2014)
As per the said rules, the expression ‘Preferential Offer’ means an issue of shares or other securities, by a company to any select person or group of persons on a preferential basis. However, shares or other securities offered through a public issue, rights issue, employee stock option scheme, employee stock purchase scheme or an issue of sweat equity shares or bonus shares or depository receipts issued in a country outside India or foreign securities are excluded. Such issue is required to be made by authorisation by a special resolution and must also comply with conditions laid down in section 42 (i.e. private placement). The price of the shares or other securities to be issued on a preferential basis, either for cash or for consideration other than cash, shall be determined on the basis of valuation report of a registered valuer. However, the price of shares to be issued on a preferential basis by a listed company will not be required to be determined by the valuation report of a registered valuer. Detailed disclosures are required to be made in the explanatory statement to be annexed to the notice of the general meeting which inter alia include the objects of the issue, basis on which price has been arrived at along with the report of the registered valuer, intention of promoters, directors or KMP to subscribe to the offer, change in control (if any) in the company that would occur consequent to the preferential offer, pre issue and post issue shareholding pattern of the company in the format prescribed under the rules.
Issue of bonus shares [Ref: Section 63]
Express provisions have been made under the Companies Act, 2013 for issue of bonus shares, which is subjected to certain conditions which include the following: i. authorisation in the general meeting of the company; ii. company must not have defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it; iii. company must not have defaulted in respect of the payment of statutory dues of the employees, such as contribution to provident fund, gratuity and bonus; iv. the partly paid-up shares, if any outstanding on the date of allotment, have to be made fully paid-up;
Provision of money by company for purchase of its own shares by employees or by trustees for the benefit of employees [Ref: Companies Share Capital & Debentures) Rules, 2014]
A company cannot make a provision of money for the purchase of, or subscription for, shares in the company or its holding company, if the purchase of, or the subscription for, the shares by trustees is for the shares to be held by or for the benefit of the employees of the company, unless it complies with certain conditions as prescribed under the said rules, which inter alia include the following: i. a person shall not be appointed as a trustee to hold such shares, if (a) he is a director, key managerial personnel or promoter of the company or its holding, subsidiary or associate company or any relative of such director, key managerial personnel or promoter; or (b) beneficially holds 10% (ten percent) or more of the paid-up share capital of the company. ii. the scheme of provision of money for purchase of or subscription for the shares as aforesaid is approved by the members by passing special resolution in a general meeting; iii. such purchase of shares shall be made only through a recognized stock exchange in case the shares of the company are listed and not by way of private offers or arrangements and in case of unlisted companies, the valuation at which shares are to be purchased shall be made by a registered valuer; iv. the value of shares to be purchased or subscribed in the aggregate together with the money provided by the company shall not exceed 5% (five per cent) of the aggregate of paid up capital and free reserves of the company; v. the explanatory statement to be annexed to the notice of the general meeting to contain particulars as prescribed under the rules. vi. Where the voting rights are not exercised directly by the employees in respect of shares to which the scheme relates, the Board of Directors shall, inter alia, disclose in the Board’s report the following details, namely:- (a) the names of the employees who have not exercised the voting rights directly; (b) the reasons for not voting directly; (c) the name of the person who is exercising such voting rights; (d) the number of shares held by or in favour of, such employees and the percentage of such shares to the total paid up share capital of the company; (e) the date of the general meeting in which such voting power was exercised; (f) the resolutions on which votes have been cast by persons holding such voting power; (g) the percentage of such voting power to the total voting power on each resolution; (h) whether the votes were cast in favour of or against the resolution.
Issue of debentures [Ref: Section 71 & Companies Share Capital & Debentures) Rules, 2014]
Issue of wholly or partly convertible debentures to be approved by a special resolution. Invitation / offer of debentures to public or members more than 500 (five hundred) will require appointment of debentures trustee. Disqualifications have been prescribed under the rules as to persons who cannot be appointed as debentures trustees and duties of trustees have also been prescribed akin to 1956 Act. Issue of secured debentures is subjected to various conditions which inter alia include: i. Debentures must be redeemable within 10 (ten) years from the date of issue, except a company engaged in the setting up of infrastructure projects may issue secured debentures for a longer period but not exceeding 30 (thirty) years. ii. security by the creation of a charge, on the properties or assets of the company, having a value which is sufficient for the due repayment of the amount of debentures and interest thereon. iii. execute a debenture trust deed to protect the interest of the debenture holders and the security for the debentures by way of a charge or mortgage shall be created in favour of the debenture trustee. iv. creation a Debenture Redemption Reserve (“DRR”) out of the profits of the company available for payment of dividend for the purpose of redemption of debentures equivalent to at least 50% (fifty percent) of the amount raised through the debenture issue before debenture redemption commences. v. On or before the 30th day of April in each year, the company is required to invest or deposit a minimum sum of 15% (fifteen percent) of the amount of its debentures maturing during the year ending on the 31st day of March of the next year, in any one or more of the following methods, namely:- (i) in deposits with any scheduled bank, free from any charge or lien; (ii) in unencumbered securities of the Central Government or of any State Government; (iii) in unencumbered securities mentioned in sub- clauses (a) to (d) and (ee) of section 20 of the Indian Trusts Act, 1882; (iv) in unencumbered bonds issued by any other company which is notified under sub-clause (f) of section 20 of the Indian Trusts Act, 1882; vi. in case of partly convertible debentures, Debenture Redemption Reserve shall be created in respect of non- convertible portion of debenture.
About Bulwark Solicitors
Bulwark Solicitors is a law firm pioneered by Solicitor Chirag Sancheti and Advocate Deep Shridharani. The firm has expertise in the areas of both Litigation and non-Litigation. Under the non-litigation Law practice, the firm practices in the areas of Corporate Law, Intellectual Property Law, Bankruptcy & Insolvency Law, Competition Law, Real Estate and Conveyancing and DTAA Advisory. Further, under Corporate Law area, we practice Company Law, Securities Law, Mergers and Amalgamations, Private Equity and Venture Capital Investment Transactions, Legal Due Diligence and Foreign Exchange Management Law.