Saturday, January 30, 2016

MCA Establishes Central Registration Centre for Reservation of Names

[The following guest post is contributed by Nikita Snehil of Vinod Kothari & Co.]

By way of a Notification dated 22nd January 2016 and in order to encourage incorporation of companies, the MCA has established a Central Registration Centre (CRC) having territorial jurisdiction all over India for discharging or carrying out the function of processing and disposal of applications for reservation of names under the provisions of the Companies Act, 2013. The CRC shall be located at Indian Institute of Corporate Affairs (IICA)[1]. The CRC has been established to facilitate smoother functioning and fastening the processing of incorporation applications, it is expected to look into the applications for name availability (INC-1 e-forms) submitted online across the country and to process the same by the end of the very next working day. Thus, CRC not only promotes uniformity in application of incorporation rules but also encourages incorporation of companies.
The CRC shall function under the administrative control of Registrar of Companies, Delhi (ROC Delhi), who shall act as the Registrar of the CRC until a separate Registrar is appointed to the CRC. The CRC shall process applications for reservation of name i.e., e-Form No. INC-1 filed along with the prescribed fee as provided in the Companies (Registration of Offices and Fees) Rules, 2014. Processing and approval of name or names proposed in e-Form No. lNC-29 shall continue to be done by the respective Registrar of Companies having jurisdiction over incorporation of companies under the Companies Act, 2013 in accordance with the provisions of the Act and the rules made thereunder.
Further, in order to facilitate the incorporation of companies, MCA on the same day has amended the Companies (Incorporation) Rules, 2014, through the Companies (Incorporation) Amendment Rules, 2016. Both the circular and the amended rules shall be effective from January 26, 2016. In this regard, set out below is a tabular comparison between the erstwhile Incorporation Rules and the amendment brought therein: 

Tabular presentation showing the changes brought through the Companies (Incorporation) Amendment Rules, 2016

Rule  no. of  the Companies (Incorporation) Rules, 2014
The Companies (Incorporation) Rules, 2014
The Companies (Incorporation) Amendment Rules, 2016
Remarks
8(2)(b)(ii)
it is not in consonance with the principal objects of the company as set out in the memorandum of association;

Provided that every name need not be necessarily indicative of the objects of the company, but when there is some indication of objects in the name, then it shall be in conformity with the objects mentioned in the memorandum

Omitted
Now​ ​the proposed name of the company shall be considered desirable even if it is not in harmony or compatible with the principal objects of the Company.
8(2)(b)(x)
the proposed name is vague or an abbreviated name such as ‘ABC limited’ or ‘23K limited’ or ‘DJMO’ Ltd: abbreviated name based on the name of the promoters will not be allowed. For example:- BMCD Limited representing first alphabet of the name of the promoter like Bharat, Mahesh, Chandan and David:

Provided that existing company may use its abbreviated name as part of the name for formation of a new company as subsidiary or joint venture or associate company but such joint venture or associated company shall not have an abbreviated name only e.g. Delhi Paper Mills Limited can get a joint venture or associated company as DPM Papers Limited and not as DPM Limited.

Omitted
The restrictions on the use of abbreviated name based on promoters are done away with. Therefore, now the abbreviated name of company based on the name of the promoter will be allowed.
8(2)(b)(xvii)
it is intended or likely to produce a misleading impression regarding the scope or scale of its activities which would be beyond the resources at its disposal

Omitted
​Now there is no need to show the scope or scale of activities in the proposed name of Company.
8(3)
If any company has changed its activities which are not reflected in its name, it shall change its name in line with its activities within a period of six months from the change of activities after complying with all the provisions as applicable to change of name.
Omitted
The need to realign the name of the company, in case of change of its activities is done away with. Therefore, now there is no need to reflect the change in its name in line with its activities undertaken by the company.

8(4)
In case the key word used in the name proposed is the name of a person other than the name(s) of the promoters or their close blood relatives, No objection from such other person(s) shall be attached with the application for name. In case the name includes the name of relatives, the proof of relation shall be attached and it shall be mandatory to furnish the significance and proof thereof for use of coined words made out of the name of the promoters or their relatives.
Omitted
The requirement of furnishing the No Objection Certificate (NOC) in case where the proposed name is of a person other than the name(s) of the promoters or their close blood and  proof of relationship, where the name includes the name of relatives, have been done away with. Therefore, such documents are not needed to be submitted henceforth.

9
An application for the reservation of a name shall be made in Form No. INC.1 along with the fee as provided in the Companies (Registration offices and fees) Rules, 2014
An application for the reservation of a name shall be made in Form No. INC-I along with the fee as provided in the Companies (Registration offices and fees) Rules, 2014 which may be approved or rejected, as the case may be, by the Registrar, Central Registration Centre (CRC).

Introduction of CRC for facilitating incorporation process and approval of incorporation applications.

36(12)(b)

Insertion after 36(12)(b):

(ba) After the resubmission of the documents and on completion of second opportunity, if the registrar still finds that the documents are defective or incomplete, he shall give third opportunity to remove such defects or deficiencies;'

Provided that the total period for re-submission of documents shal1 not exceed a total period of thirty days.



Though the opportunities for re-submitting the documents have been increased, the total period for re-submission of documents has been limited to a period of 30 days.
36(12)(c)
In case, the Registrar is of the opinion that the document is defective or incomplete in any respect after giving such two opportunities, the e-form INC-29 of the proposed company shall be rejected.
In case, the Registrar is of the opinion that the document is defective or incomplete in any respect after giving such three opportunities, the e-form INC-29 of the proposed company shall be rejected.
Now there are three re-submission opportunities instead of two chances, which will indeed help the applicant and increase the scope of furnishing the documents as required by the Registrar.


- Nikita Snehil




[1] IICA has been established by the Indian Ministry of Corporate Affairs for capacity building and training in various subjects and matters relevant to corporate regulation and governance such as corporate and competition law, accounting and auditing issues, compliance management, corporate governance, business sustainability through environmental sensitivity and social responsibility, e-governance and enforcement.

Thursday, January 28, 2016

Exit Route For Companies Who Have Made Deemed Public Issues

[The following guest post is contributed by Amitabh Robin Singh, who is an Associate at DSK Legal]

The Securities and Exchange Board of India (“SEBI”) has recently issued a circular (“Circular”) which has allowed companies which have made deemed public offers (allotment of securities to more than 49 persons under the Companies Act, 1956) to escape penal action if the securities have not been allotted to more than 200 persons in a financial year (the threshold for deemed public issues under the Companies Act, 2013). This has been done considering that the threshold for a deemed public offer has increased from not more than 49 persons to not more than 200 persons with the enactment of the Companies Act, 2013.

The Circular applies to companies that have made deemed public issues prior to April 1, 2014, which is the date on which the relevant section (Section 42) and rule (Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014) of the Companies Act, 2013 were brought into force.

Generally companies who make a deemed public offer without complying with the provisions of the then in force Companies Act and extant SEBI guidelines are barred along with their promoters and/or directors by SEBI from accessing the securities market for a particular period of time which is stipulated in the relevant order against the company.

Pursuant to the Circular, an erring company can avoid penal action by giving the holder of the security (if the security has been transferred since allotment, then to the transferee-current holder) an option to surrender the securities at a price not less than the subscription amount plus 15% interest or any such higher return which was promised to the investors.

It is pertinent to note that the term used is “amount of subscription money”. So it appears that if the holder of the security on the date of the refund is a subsequent transferee from the original subscriber, the base refund amount is to be the original subscription price and not the price at which the security was transferred to the current holder. This position seems to be reasonable.

An interesting point to examine here is the catchment area of the Circular. How many companies, which have made deemed public issues prior to April 1, 2014, will be able to benefit from the Circular and avoid penal action?

Upon perusing the last five orders passed (chronologically) in relation to deemed public issues being Amazon Agro Products Limited, Vaibhav Pariwar India Projects Limited, Bharatiya Real Estate Development Limited, Mondal Construction Company Limited and SEBA Real Estate Limited, it can be seen that none of these cases will fall within the purview of the Circular. This is due to the fact that none of the abovementioned companies had allotted securities to between 50 and 200 persons in all of the relevant years in which the concerned security was allotted. The number exceeded 200 in all of the abovementioned cases.

To see an order which would have come under the purview of the Circular, one has to go back to Prayas Projects India Limited, dated December 29, 2015, in which the securities were issued to not more than 200 persons in all of the concerned financial years in which the security was allotted. In this case the securities were allotted to 107 and 47 subscribers in the respective financial years.

From the date of the passing of the Prayas Projects order till date more than ten other orders have been passed on the matter of deemed public issues all of which would not have been benefited by the Circular due to the allottees being more than 200 in number, so it can be seen that cases to which the Circular will give benefit to in the future may not be very commonplace.

The Circular goes on to lay down the procedure for implementing the refund stating that the process which the company undertakes to effect the mandated refund needs to be evidenced by proof of dispatch of the refund. Also, the refund is required to be made through cheques, demand drafts or Internet banking channels to enable the trail of the money to be clearly traced.

The company is also required to submit a certificate from a practicing chartered accountant to certify compliance with the refund process which states that the chartered account has verified all documents relating to the refund such as proof of dispatch of letters and the company’s bank statements, etc.

In conclusion, despite the fact that a good number of companies that have made deemed public issues will not benefit from the Circular, it does not seem to be the intention of SEBI to give such companies an escape from penal action which have mobilized funds from a larger amount of people going beyond the increased threshold ushered in by the Companies Act, 2013. Hence, companies and promoters/and or directors who have made comparatively smaller deemed public issues can avoid being barred from the securities market and continue their involvement in the market.

- Amitabh Robin Singh


Tuesday, January 26, 2016

What is a Foreign Company Under the Companies Act?

[This guest post is contributed by Ananya Banerjee, who is a Fifth year B.A.LLB(H) Student, Department of Law, University of Calcutta.

The post relates to an interpretation of certain provisions of the Companies Act, 2013, and represents the view of the author, which have been backed up by arguments and reasoning. The possibility of alternative views and interpretation cannot be ruled out]

This post deals with some issues arising out of Chapter 22 of the Companies Act, 2013 (“Act” or “New Act”) and examines the same in the light of the provisions of the Companies Act, 1956 (“Old Act”).

Definition of Foreign Companies

Definition of Foreign Companies under the Old Act: The definition Section of the Old Act does not define foreign companies. However, Section 591 lays down that, all foreign companies mentioned therein shall have to comply with the provisions of Sections 592 to 602. Subsection 1 clarifies that foreign companies shall mean the following two classes of companies:

a)   companies incorporated outside India which, after the commencement of the Old Act, establish a place of business within India; and

b)   companies incorporated outside India which have, before the commencement of the Old Act, established a place of business within India and continue to have an established place of business within India at the commencement of the Old Act.

Hence, Section 591(1) was held to be the definition section for the purpose of foreign companies under the Old Act. Hence, under the Old Act a foreign company is:

i.    a company incorporated outside India;

and

ii.   having a place of business in India, whether established before the commencement of the statute, or afterwards.

Definition of Foreign Companies under the Act: The Act clearly defines a foreign company under Section 2(42). A foreign company is any company or body corporate incorporated outside India which—

a)   has a place of business in India whether by itself or through an agent, physically or through electronic mode;

and

b)   conducts any business activity in India in any other manner.

Hence, a foreign entity to be considered as a foreign company, has to fulfill both the criteria mentioned above, i.e., having a place of business in any manner specified above, and conducting any business activity in India.

Scope of the Two Definitions: The scope of definition of the foreign company has been expanded to a great extent under the Act. While the Old Act only referred to a company, the New Act refers to a company or any body corporate incorporated outside India. Hence, other foreign entities can also be treated as a foreign company under the New Act, subject to the other conditions. Moreover, the old definition mentioned only about a place of business. A place of business could traditionally mean place of business like a branch office, liaison office or a project office or similar place of business. The New Act is drafted during a time when electronic modes of business have achieved tremendous popularity and it is possible for entities incorporated outside India to carry out business activities without having any physical presence in India. In order to monitor all such foreign entities, the Act defines a foreign company as a foreign body corporate (or company) which has a place of business by itself or through its agents. In addition to that, it also includes a place of business kept through electronic mode. The Companies (Registration of Foreign Companies) Rules, 2014 has further explained the term electronic mode as any of the transactions mentioned below, carried through an electronic mode:

- business to business and business to consumer transactions, data interchange and other digital supply transactions;

- offering to accept deposits or inviting deposits or accepting deposits or subscriptions in securities, in India or from citizens of India;

- financial settlements, web based marketing, advisory and transactional services, database services and products, supply chain management;

- online services such as telemarketing, telecommuting, telemedicine, education and information research; and

- all related data communication services,

Such transactions would be considered as having a place of business in electronic mode, irrespective of whether they are conducted by e-mail, mobile devices, social media, cloud computing, document management, voice or data transmission or otherwise. Further, the scope of keeping a place of business through electronic mode is not restricted within the definition given above. The definition of electronic mode lays down that it shall include the abovementioned transactions but shall not be restricted to such transactions. Thus, the provisions of the New Act, read with the rules made thereunder have included all those foreign entities which (i) maintain a place of business in India, either through themselves or through their agents, either physically or through various electronic modes; and (ii) which carry out any business activity in any manner in India.

Foreign Companies having 50% Indian Ownership

Position under the Old Act: As provided under Section 591(2) of the Old Act, the foreign companies where “not less than fifty per cent, of the paid-up share capital (whether equity or preference or partly equity and partly preference) of a company incorporated outside India and having an established place of business in India, is held by one or more citizens of India or by one or more bodies corporate incorporated in India, or by one or more citizens of India and one or more bodies corporate incorporated in India, whether singly or in the aggregate”, such companies were treated as companies incorporated in India with respect to the business conducted by them in India. If we analyse the provisions of this sub-section, we see that foreign companies where 50% of the total paid-up share capital (calculated on a fully diluted basis) is owned by Indian entities or Indian citizens, whether in aggregate or by one such person or entity, were treated as Indian companies with respect to the business conducted by them in India. The rights and liabilities of such companies were similar to that of Indian companies and they did not have to comply with the provisions of Sections 592 to 602 of the Old Act.

The Old Act was operative during a time period where Indian entrepreneurs hardly owned or controlled foreign entities and so, this privilege was available to those few entities which fulfilled the abovementioned conditions. However, with the growth of Indian economy, Indian entities and individuals started establishing and controlling foreign entities. In addition to that, due to the privilege of being treated as an Indian company within the purview of the Old Act, some Indian individuals (also, entities) established business in tax saving countries just to evade Indian taxation regime, although they made India their principal place of business.

Position under the New Act: The position of the foreign companies, under the Act, where Indian entities or individuals or both own at least 50% of the paid-up share capital, calculated on a fully diluted basis, is radically different than under the Old Act. As per the provisions of Section 379 of the Act, such companies will have to comply with the provisions of Chapter XXII of the Act, as well as such other provisions as may be prescribed with regard to the business carried out by those companies in India, as if they were incorporated in India. Hence, these foreign companies not only have to follow the provisions applicable to the foreign companies, they would also have to follow the provisions applicable to the Indian companies, as prescribed under the Act. So, evidently, the compliance requirements have been increased for this type of foreign companies and thus, the Indian citizens or individuals would have to keep these issues in my while structuring their foreign operations.

Dealing with the Confusion

The heading of Section 379 says ‘Application of Act to Foreign Companies’, which has considerably created a confusion in many minds whether the provisions of Chapter 22 of the Act would be applicable to only those companies mentioned under that Section or to all foreign companies coming under the purview of the definition. Several articles have adopted the position that the provisions of that Chapter are applicable only to the companies mentioned under Section 379. However, I beg to differ. One cannot interpret a full chapter reading the heading of one Section. The heading may only be interpreted for the purpose of that Section and not for other sections. Moreover, the Chapter heading does not specify foreign companies having 50% Indian ownership. It says ‘Companies Incorporated outside India’. The subsequent Sections also do not specify that only those foreign companies mentioned under Section 379 of the Act would have to follow the provisions of Chapter 22. It says foreign companies and it would naturally mean the foreign entities defined to be foreign companies under the definition section.

If, for the sake of argument, we say that the Chapter is applicable only to such companies where Indian citizens and entities have at least 50% ownership, then what happens to those foreign entities which do not have such ownership and yet operates within India? Does the Act exempt all such foreign companies? Wouldn’t such companies have any liability under the Act? Even the Old Act provided enough provisions to control the activities of foreign companies operating in India. Then why would the New Act not provide the necessary provisions? Is it a feasible conclusion that foreign entities having a place of business in India and conducting business in India would not be accounted for their activities conducted in India? The answer is ‘NO’. It is not a feasible conclusion.

The provisions of the New Act are more extensive than the Old Act and so is the case for foreign companies. Chapter 22 of the Act, thus, would be applicable to all the foreign entities coming under the purview of the definition of foreign companies as given in the New Act, including those foreign companies where at least 50% ownership belongs to Indian citizens and/or entities.

Example 1: Now, let me try to further explain this through some examples. Suppose A is a foreign company, i.e. a foreign entity having a place of business in India and conducting business in India. Mr. X, Ms. Y and M/s. Z are the shareholders of A where Mr. X holds 50%, Ms. Y holds 30% and M/s. Z owns the rest, i.e. 20%. Now, suppose Mr. Y is an Indian citizen and M/s. Z is an Indian company. So, total 50% of the ownership of A belongs to Indian individuals and Indian entities in aggregate.

Under the provisions of Section 591 of the Old Act, A would be treated as a foreign company. Yet, it would be treated as a company incorporated in India for the purpose of the business conducted by A in India, as provided under Sub-section 2 of Section 591 and would not have to comply with the provisions laid down in Sections 592 to 602 of the Old Act.

Under the provisions of Section 379 of the New Act, however, A would have to comply with the provisions of Chapter 22 of the New Act in addition to such other provisions as prescribed for the companies incorporated in India (only with regards to the business conducted in India). So, A would not be exempted from the provisions of Sections 380 to 393 of the Act, unlike the Old Act.

Example 2: If however, there is still any confusion, then let us consider one more example. Suppose Company A, Company B, Company C and Company D are all incorporated outside India. In Company A, Indian entities and citizens hold 50% of the total paid-up share capital. In Company B, an Indian individual owns 40% of the total paid-up share capital. In Company C, Indian entities own 70% of the paid-up shareholding capital and in Company D, no Indian entities or individuals own any securities. Now, while Company A, Company B and Company D – all of them conduct business activities in India and have places of business in India, through electronic mode or otherwise, Company C does not carry out any business activity in India. As per the provisions of the New Act, each of the companies shall have the following responsibilities:

Company A: It has a place of business in India and conducts business activity in India. So, it is a foreign company which also complies with the provisions of Section 379 of the Act. Hence, it would not only have to comply with the provisions of Chapter XXII, it’d also have to comply with such other prescribed provisions as are applicable to Indian companies with regards to its business conducted in India.

Company B: It has a place of business in India and conducts business in India. However, it does not fulfill the conditions of Section 379. So, it would not have to comply with the provisions applicable to Indian companies, as prescribed, although, it would still have to comply with the provisions of Chapter 22 of the Act.

Company C: It does not carry out any business activity in India. Hence, even though more than 50% of the paid-up share capital belongs to Indians, it would not be a foreign company within the meaning of the New Act.

Company D: Company D has a place of business in India and conducts business activities in this country. But it does not fulfill the conditions of Section 379. However, it would still have to comply with the provisions of Chapter 22 applicable to foreign companies.

Conclusion

This post does not delve into the details as to what are the duties and responsibilities of foreign companies under the New Act as the other provisions of Chapter 22 of the Act are pretty clear. Every foreign company or body corporate which is conducting business in India and has a place of business (in any manner discussed in this post) shall now have to comply with the provisions of the Chapter which would necessarily include the foreign entities owned or controlled (at least 50% of the paid-up share capital should belong to Indian citizens and/or entities) by Indian entities or individuals or both.

- Ananya Banerjee