Monday, January 23, 2017

Exemptions to companies operating from the IFSC

[The following guest post is contributed by Amitabh Robin Singh, who is a corporate lawyer practising in Mumbai.]

Continuing with the Government's efforts to promote the International Financial Services Centre ("IFSC"), the Ministry of Corporate Affairs ("MCA") has issued notifications dated January 4, 2017, which provide an exemption from (or modify) certain provisions of the Companies Act, 2013 ("Companies Act") for financial services companies licensed to operate from the IFSC.

There have been two separate notifications: one for private companies in the IFSC and one for unlisted public companies in the IFSC. In this post, I discuss some of the exemptions granted to unlisted public companies licensed to operate from the IFSC ("IFSC Public Companies").

One interesting point on the notification regarding IFSC Public Companies ("Notification") is that it exempts such companies from certain provisions which normal private companies are already exempt from by virtue of an exemption notification date June 5, 2015. These include section 117(3)(g) which requires a company to file certain board resolutions passed by the Company in the form MGT-14 (as I have discussed earlier on this Blog) and the second proviso to section 188(1) which debars related parties from voting on shareholders' resolutions in which they are interested.

One relaxation granted to IFSC Public Companies is by amending section 21 of the Companies Act to allow an officer or any other person” to authenticate documents and execute contracts on behalf of a company. The existing position mandates that such powers may only be vested in key managerial personnel and officers of a company. This is in line with the Companies (Amendment) Bill, 2016 ("Amendment Bill") which aims to broaden the ambit of section 21 based on the recommendations of the Companies Law Committee. However, there is one interesting divergence between the Amendment bill and the Notification: the Amendment Bill uses the terms "an officer or employee of the company" while the Notification uses the phrase “an officer or any other person”. This dichotomy is interesting, seeing that IFSC Public Companies have been given more leeway than the legislature proposes to grant normal companies.

Also, IFSC Public Companies have been granted exemption from sections 42(3) and 42(7) which relate to the private placement process. Section 42(3) lays down that when one offer of securities is already open, it is not permissible to make a fresh offer of securities. While the Notification gives a carte blanche exemption from this requirement, the Amendment Bill lays down that such offers shall only be permitted to be made in accordance with rules which are to be prescribed.

Further, the requirement of a company under section 42(7) to keep a record of all private placements and file them in the Form PAS-5 has been done away with for IFSC Public Companies.

There has also been a relaxation in the timelines specified for the rights issue process under section 62(1)(a). Normally, a minimum of 15 days is required to be given to a person to whom shares have been offered to respond to the offer. However, the Notification adds the following proviso:

Provided that notwithstanding anything contained in sub-clause (i), in case of a Specified IFSC public company, the periods lesser than those specified in the said sub-clause shall apply if ninety per cent. of the members have given their consent in writing or in electronic mode.”

While the language is slightly unclear due to the usage of the phrase "the periods lesser than those specified", the intent appears to be to permit IFSC Public Companies to speed up their rights issue process by permitting them to truncate the offer period if the requisite majority approves.

Interestingly, the Notification has exempted IFSC Public Companies from many corporate governance requirements such as constituting an audit committee and nomination and remuneration committee for certain companies (sections 177 and 178). Also, the caps on managerial remunerations prescribed under Schedule V, by way of section 197, have been made inapplicable to IFSC Public Companies. Further along these lines IFSC Public Companies have been exempted from having to follow the secretarial standards prescribed by the Institute of Company Secretaries of India which lay down minute details on the conduct of board and shareholders' meetings (section 118(10)). Also, the corporate social responsibility provisions will not apply to an IFSC Public Company for the first five years of its existence.

One more exemption which has been granted along similar lines with the exemptions to normal private companies (mentioned above) is regarding the limitations on the powers of the board contained in section 180 of the Companies Act. IFSC Public Companies will also not be required to pass special resolutions to execute the actions specified in section 180 (such as disposing of assets or borrowing money beyond specified limits). However, there is a rider here that does not apply to normal private companies - the articles of association of the IFSC Public Company must provide for this exemption.

The requirement for certain classes of companies to appoint a woman director on its board will also not apply to IFSC Public Companies. Another pertinent relaxation granted to IFSC Public Companies is that the mandate to have at least one director resident in India for at least 182 days in a year will only be applicable from its second financial year of existence onwards.

Another exemption which has been granted to IFSC Public Companies, which is contemplated in the Amendment Bill, is making the requirement cast upon a director to forward his resignation to the Registrar of Companies in his individual capacity in the form DIR-11 optional. The Companies Law Committee had recommended this change while reasoning that very few companies misuse the names of erstwhile directors. However, as a matter of prudence going forward, it would still be advisable for a director to make the requisite filing (despite it not being mandatory) to avoid any liability issues which may happen to arise.

Hence, as it can be seen, the MCA has looked to the Amendment Bill and the exemption notification for private companies of 2015 for some of the exemptions that it has granted to IFSC Public Companies. While this is an interesting move by the MCA, it is yet to be seen whether it succeeds in providing tailwinds to the idea of an IFSC in India.

- Amitabh Robin Singh

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