Amendment to Share Capital and Debentures Rules

Ministry of Corporate Affairs recently introduced amendment to the Companies (Share Capital and Debentures) Amendment Rules 2015.

These Amendments shall come into force on publication on official gazette i.e.

Application of these Rules:

Rule 3 related to applicability of these rules have been substituted as under:

The provisions of these rules shall apply to –

(a) all unlisted public companies:

(b) all private companies: and

(c) listed companies so far as they do not contradict or conflict with any other regulation framed in this regard by the Securities and Exchange Board of India.

As discussed earlier here, this rule earlier has no change as far as wording is concern but has significant punctuation difference. This is worthy to note that phrase “o far as they do not contradict or conflict with any other regulation framed in this regard by the Securities and Exchange Board of India” now part of clause (c) of Rule 3 as it is printed in case line with only one space not in another line. This punctuation may denote this phrase has no application in relation with companies mentioned in clause (a) and clause (b).

Certificate of shares:

First proviso to clause (b) of Sub – Rule (3) of Rule 5 has been omitted and wording of other two proviso corrected in alignment with this omission.

We have discussed this proviso earlier here. Earlier, a company secretary if appointed by virtue of its appointment and any other person authorised by the Board for the purpose (by way of resolution, off course) could sign share certificate two duly authorised (by way of resolution, off course) directors. Now, this deletion creates a requirement for a company to pass resolution authorising its company secretary to sign share certificate. Thankfully, a resolution authorising company secretary of the company once passed shall remain valid until withdrawn unless passed with a certain validity period.

Issue of renewed or duplicate share certificate

As discussed earlier here, in term of Rule 6(2)(c), in case of listed companies, the duplicate share certificates shall be issued within a period of fifteen days, from the date of submission of complete documents with the company. Present amendment increased this period from fifteen days to forty – five days.

Issue of employee stock options

As discussed earlier here, in term of Clause (c) of Explanation to sub – rule (1) of Rule 12 of original rules, for the purpose of issue of employee stock options ‘‘Employee’’ includes an employee as defined in clauses (a) or (b) of a subsidiary, in India or outside India, or of a holding company of the company or of an associate company. Present amendment omit          the words “or of an associate company” to the effect that employee of associate company is no longer employee of the company for the purpose of issue of employee stock options.

Issue of shares on preferential basis

This amendment more specifically deals with right issue, which is talk of town these days.

Readers may have been aware with this discussion earlier here:

“For the purposes of issue of shares on preferential basis under clause (c) of sub-section (1) of Section 62, If authorized by a special resolution passed in a general meeting, shares may be issued by any company in any manner whatsoever including by way of a preferential offer, to any persons whether or not those persons include the persons referred to in clause (a) or clause (b) of sub-section (1) of section 62 and such issue on preferential basis should also comply with conditions laid down in section 42 of the Act.

This make clear that Section 42 which is private placement shall always be read with Section 62(1)(C) read with Rule 13 of these Rules. Section 42 will not apply to 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.”

Through this amendment, present first proviso to sub – rule (1) of the Rule 13 has been made second proviso by inserting a proviso before present proviso:

Provided that in case of any preferential offer made by a company to one or more existing members only, the provisions of sub-rule (1) and proviso to sub-rule (3) of rule 14 of Companies (prospectus and Allotment of Securities) Rules, 2014 shall not apply.

This proviso clarifies much awaited issue related to right issue. This simply put all interpretation issues and practical queries to a certain logical end. This proviso make provisions of sub-rule (1) and proviso to sub-rule (3) of rule 14 of the Companies (prospectus and Allotment of Securities) Rules, 2014 inapplicable in case of right issue.

We have discussed earlier here, Rule 14 of the Companies (prospectus and Allotment of Securities) Rules, 2014. For the purpose of right issue, this is made clear that offer of invitation of securities and filing of Form PAS – 4 is not required now. All other provision of Rule 14 shall still be applicable.

Debentures

Presently Clause (d) of sub – rule (1) of rule 18 read as under:

“the security for the debentures by way of a charge or mortgage shall be created in favour of the debenture trustee on-

(i) any specific movable property of the company (not being in the nature of pledge); or

(ii) any specific immovable property wherever situate, or any interest therein.”

Now this is substituted with:

“the security for the debentures by way of a charge or mortgage shall be created in favour of the debenture trustee on-

(i) any specific movable property of the company ; or

(ii) any specific immovable property wherever situate, or any interest therein:

Provided that in case of a non-banking financial company, the charge or mortgage under sub-clause (i) may be created on any movable property”

There are effects of this substitution:

1. Charge may be created on immovable property in the nature of pledge; and
2. In case of a non – banking financial company charge may be created on any movable property which may not be a specific property.

Further, two proviso to this clause has been introduced:

“Provided further that in case of any issue of debentures by a Government company which is fully secured by the guarantee given by the Central Government or one or more State Government or by both, the requirement for creation of charge under this sub-rule shall not apply.

Provided also that in case of any loan taken by a subsidiary company from any bank or financial institution the charge or mortgage under this sub-rule may also be created on the properties or assets of the holding company.”

Effect of these proviso:

1. a Government company may issue debenture fully secured by the guarantee given by a government.
2. A loan taken by a subsidiary company may be secured on the property of the holding company.

We have also discussed earlier here,

A trust deed in Form No SH – 12 or as near thereto as possible shall be executed by the company issuing debentures in favour of the debenture trustees within sixty days of allotment of debentures.

Now sub – rule (5) of Rule 18 has been amended to the effect that period for execution of debenture trust has been raised from period of sixty days of allotment of debenture to within three months of closure of the issue or offer.

Thereafter, two new sub rules has been introduced:

“(9) Nothing contained in this rule shall apply to any amount received by a company against issue of commercial paper or any other similar instrument issued in accordance with the guidelines or regulations or notification issued by the Reserve Bank of India.

(10) In case of any offer of foreign currency convertible bonds or foreign currency bonds issued in accordance with the Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 or regulations or directions issued by the Reserve Bank of India, the provisions of this rule shall not apply unless otherwise provided in such Scheme or regulations or directions.”

The effect of these sub – rules (9) and (10) of Rule 18 is:

1. Commercial paper, issued as per RBI guidelines/regulations shall not be treated as debentures;
2. In case of foreign currency convertible bonds or foreign currency bond these rules shall not apply.

Nomination:

We discussed earlier here, Where the nominee is a minor, the holder of the securities, making the nomination, may appoint a person in Form SH – 14 who shall become entitled to the securities of the company, in the event of death of the nominee during his minority.

Close reading suggested that Form SH – 13 should have deal with nomination and Form SH – 13 should have deal with cancelation etc.  Now, this position is corrected by substituting “Form SH – 14” with “Form SH – 13”.

Accordingly Form SH – 13 and Form 14 has also been amended to give effect of this substitution.