presentation on companies bill aug 26

8/13/2019 Presentation on Companies Bill Aug 26

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Conference Call on Companies Bill

Companies Bill 2012 | 1

In association with


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SPEAKERS FROM BMR ADVISORS

Vivek Gupta

Rajendra Nalam

Kalpesh Maroo

Companies Bill 2012 | 2


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CONTENTS

I. Introduction

II. Governance & Others

III. M&A

IV. Closing remarks and Q&A

| 3Companies Bill 2012


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INTRODUCTION

Companies Bill 2012 ( Bill ) was passed by Upper House of the Parliament on

August 8, 2013 (the Lower House of the Parliament had approved the Bill onDecember 18, 2012)

The Bill now needs presidential assent and notification in the Official Gazette toreplace the existing Companies Act, 1956 ( the Act )

The Bill consists of 29 Chapters, 470 Clauses and 7 Schedules. It is important tonote here that most of the provisions of the Bill are subject to rules, which are yet tobe formalized

Based on press releases, the Ministry of Corporate Affairs expects all rules regardingthe Bill to be in place by March 31, 2014 after taking in account the suggestions

from various stakeholders

The Bill marks a decisive change in India's corporate law regime in view of the changingeconomic and commercial environment, and for an alignment with other Indian regulations



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TRANSITION TO THE BILL

Repeal of the Act

and transition to

the Bill

On enactment and notification of the Bill, the Act (except for certain specifiedprovisions) shall stand repealed

Any action under the Act including those taken by any authority will continueto be valid and in force so long as the same is not inconsistent with theprovisions of the Bill

Any principle or rule of law, form or course of pleading, practice or procedureetc shall not be affected

Bill envisages that all powers and functions of the Company Law Board,Company Court and those of BIFR under the Sick Industrial Companies Actwould be exercised by the National Company Law Tribunal ( the Tribunal )

Bill provides that until the Government notifies a date for transfer of allmatters, proceedings or cases to the Tribunal, the provisions of Act in regardto the jurisdiction, powers, authority and function of the current CompanyLaw Board and the Company Court shall continue to apply



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II. GOVERNANCE & OTHERS


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CONSTITUTION AND CAPITAL

New Concepts Capital Raising Rights Changes


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CONSTITUTION AND CAPITAL (1/7)


Small Company

One PersonCompany

Dormant Company

One Person Company

Company which only has a singlemember

Ambiguity on whether the membershipof an One Person Company (OPC) isrestricted to natural persons only

Public companies can be converted intoOPCs

PublicCompany

Private Company

One PersonCompany

Min 2 membersMax - 200

DormantCompany

ActiveCompany

SmallCompany

Small Company

Company other than a public companyPaid up capital does not exceed 50 lakhrupees or the amount prescribedTurnover as per last profit and lossaccount does not exceed INR 2 crore orsuch higher amount as prescribedCannot be a holding company or asubsidiary company



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Relatively lower level of differentiation between normal private companies andpublic companies

Relaxation in provisions relating to general and board meetingsCash flow statements not part of Financial statementsDormant Company can opt for strike off from the registrar

Dormant Company

No business or operation

No significant accounting transaction in last 2 Financial Years (FYs)

Not filed financial statements and annual returns during the last 2 FYs

Dormant CompanySmall Company One Person Company


Small Company

One PersonCompany

Dormant Company



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Preference shares

Private Placement

Further issue

Share premium

Shares at discount

Preference Shares

Infrastructure companies allowed to issue preference shares with more than20 year tenure

Private PlacementOffer or invitation to subscribe securities to a selectgroup of persons

Private companies could raise capital under privateplacement

Offer cannot be made for more than 50 persons in afinancial year except for allotments to QualifiedInstitutional Buyers, employees etc

Plugs loopholes incapital raisingpractices




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Preference shares

Private Placement

Further issue

Share premium

Shares at discount

Further Issue

Share Premium

Certain class of companies (to be specified) cannot utilize share premium towards

premium payable on the redemption of any redeemable preference shares /debentures

Provisions relating to rights issue now applicable toprivate companies as well

If shares are to be issued to persons other thanexisting shareholders and employees,

3/4 th approval requiredPrice of such shares has to be determined by aregistered valuer

Interplay with

FEMA pricing norms

Income-tax ValuationRules




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Preference shares

Private Placement

Further issue

Share premium

Shares at discount

Shares at a discount

Company is not allowed to issue shares at adiscount except sweat equity

Shares issued by a company at a discounted price

shall be void

Discounted Price vsDiscount to Par value??




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Differential rights

Variation of rights

Differential rights

Variation of rights

Variation of rights of a particular class would now require approval from the otherclass if such variation impacts their rights

Permits issue of shares with differentialvoting and dividend rights subject toprescribed rules

No exemption to private limited companies


Impacts capitalstructuring in privatecompanies



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Alteration of capital

Transfer of shares

Alteration of capital

Consolidation and division of share capital which results in changes in the votingpercentage of shareholders can take effect only after approval from the Tribunal


Transfer of shares

Restriction on transfer of shares of public companies based on shareholder pactsgiven recognition ( Discus sed later )



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CORPORATE GOVERNANCE

General MeetingBoard Management

RecordsRPT Loans


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Independent Directors

Guidelines similar to Clause 49 in relation to Independent Directors (IDs) nowincorporated Applicable for listed companies

Stringent eligibility conditions and cap on directors overall 20 with not more than10 public directorships

Minimum term of 5 years prescribed with a maximum of 2 terms

To maintain gap of 3 years after 2 terms

Remuneration restricted to sitting fees, reimbursement, profit linked commission.Stock options are prohibited

Liability of IDs restricted to acts/ omissions that occurred with his knowledge ORwhere he had not acted diligently

Composition

Conduct

IndependentDirectors

CORPORATE GOVERNANCE (2/8)

RecordsGeneral Meeting ManagementBoard RPT Loans



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Interval

Electronic Voting

Quorum

General Meeting

No statutory meetings

First annual general meeting within 9 months from the date of closing of the FY

Subsequent annual general meeting within 6 months from the date of closing of theFY

Electronic voting allowed in the case of specified companies

Quorum requirements Public companies

Having < 1,000 members 5

Having >1000 but 5,000 50

Quorum requirements Private companies 2





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Management

No change in the limits of overall/ individual limits of managerial remuneration

Certain class of companies to mandatorily appoint

MD / CEO / Manager

CFO

CS


Appointment




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Scope

Approvals

Violation

Approvals and Violation

All related party transactions require Board approval

Central Government approval replaced with shareholders approval for companieshaving prescribed paid-up capital (to be prescribed)

Interested shareholders not allowed to vote

Person convicted of an offence in relation to RPTs at any time during the last 5 yearsbarred from becoming a director





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Scope expanded to include persons other than body corporate

Private companies and wholly owned subsidiaries also covered

Rate of interest on loans to be linked to Government securities instead of theprevailing bank rate

Inter-corporate loans / guarantees / investmentsInter-corporate

Directors

Loans/ Guarantees to Directors, others, etc

Loans/ guarantees by a company to its directors/ to persons in whom directors areinterested prohibited except

Exemption to rule:

Loans to managing directors/ whole-time directors, subject to conditions

Loans in the ordinary course of business at rates laid down by RBI

No exemption for issue of guarantees under any circumstances

Private companies and wholly owned subsidiaries also covered





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CORPORATE SOCIALRESPONSIBILITY

ComplianceScope


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CORPORATE SOCIAL RESPONSIBILITY (1/2)

Corporate Social Responsibility (CSR) made mandatory forall companies (public and private) meeting the followingcriteria:

Net-worth of 500 crores (5,000 millions) or more orturnover of 1000 crores (10,000 millions) or more or netprofit of 50 million or more in any financial year

Qualifying companies to constitute a CSR Committee with 3or more directors one of whom shall be an ID

CSR Committee to formulate and recommend a CSR Policy

Board to ensure company spends at least 2% of its averagenet profits in the last three years

CSR Requirement

CSR casts anadditionalsocial burdenon largecompanies

Comply orreportapproachadopted toenforce CSRobligations

CSR Requirement

Violation

Consequences

Scope Compliance



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CORPORATE SOCIAL RESPONSIBILITY (2/2)

Board to give justifications in its report for failure to meet CSR obligations

No penal consequences on failure to meet CSR obligations?

ConsequencesCSR Requirement

Violation

Consequences



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ACCOUNTS AND AUDIT

Financial Statements Audit


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ACCOUNTS AND AUDIT (1/3)

FY

Consolidation

Cash FlowStatement

Reopening

NFRA

FY

Uniform financial year for all companies period ending March 31

Companies having foreign holding companies/ foreign subsidiaries which arerequired to follow a different period under the foreign laws for consolidation canfollow different FY


Consolidation of financial statements of subsidiaries is mandatory

Subsidiary shall include Joint Venture & Associates

Holding company to include consolidated financial statements as part of its financials

Consolidation

Annual return of every company (except one person company, small company anddormant company) to have a cash flow statement

Cash Flow Statement



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FY

Consolidation

Cash Flow Statement

Reopening

NFRA


Re-opening

Companies now allowed to recast their financial statements

On an order passed by Tribunal / court of competent jurisdiction

Voluntarily

Application for re-opening can be made by the Central Government, SEBI, Income-tax

authority, etc

NFRA

National Financial Reporting Authority to be constituted to prescribe matters inrelation to accounting and auditing standards



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Term

Rotation

Conflicts

Term

Individual auditor not to hold office for > 5 years and audit firm not to hold officefor > two terms of 5 years

Signi f icant s t ress on audi t func t ion and audi tors independence to ensure b e t te r

qual i ty audi t s


Mandatory rotation of auditors for listed companies and other class ofprescribed companies

Rotation

Prohibition from rendering accounting, book keeping, investment banking,internal audit services, management services, etc directly or indirectly to thecompany or its holding/ subsidiaries

Conflicts



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OTHER SIGNIFICANT CHANGES

Frauds Strike-off


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OTHER SIGNIFICANT CHANGES (1/2)

Fraud defined in a broad manner to include any act or omission or abuse of positionwith an intent to deceive or obtain undue gain or to injure the interests of thecompany, its shareholders or its creditors or any other person

Persons convicted of fraud subject to severe penal consequences and imprisonmentfor up to a maximum of ten years

FraudsFraud

SFIO

SFIO

Serious Fraud Investigation Office (SFIO), in existence since 2003 as anon-statutory body of the Ministry of Corporate Affairs being recognized

Statutory recognition given to SFIO to act as a nodal agency for investigation offrauds

SFIO bestowed with the powers of a magistrate

Frauds Strike-off



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Strike-off Strike-off

A companys name can be removed from the register of companies under the followingcircumstances

The company has failed to commence operations within 1 year from incorporation

The subscribers to its memorandum have failed to pay the subscription amountwithin a period of 180 days

The Company is not carrying on any business or operations for 2 years and hasnot applied to be regarded as a dormant company

Frauds Strike-off

OTHER SIGNIFICANT CHANGES (2/2)



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Expanded scope

Closure

Foreign Companies

Definition of Foreign Company widened toinclude place of business

through an agent,

physically or electronically; and

conducts any business activity inIndia in any other manner

Closure of a foreign company is now aCourt process

Wide implication forcompanies operatingthrough agents

No distinction between

Independent anddependent agencies

Foreign companieshaving agents in Indiamay require registration

FOREIGN COMPANIES

Foreign Companies



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III. M&A


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M&A -RESTRUCTURING/ARRANGEMENTS

New concepts Procedural changes


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RESTRUCTURING/ARRANGEMENTS (1/7)

Cross border

merger

Contractual mergers

Merger with unlisted

company

Treasury stock

Others

Merger of Indian company into foreign company

Under the Act, foreign companies are allowed tomerge into Indian companies, the reverse is notpermitted

Bill now provides for the merger of an Indiancompany into a foreign company located in certain

jurisdictions (to be notified)

Merger of an Indian company with a foreigncompany or vice-versa can be undertaken subjectto approval from Reserve Bank of India (RBI)

The consideration for merger can either be in cashor Depository Receipts (DR) or partly in cash andpartly in DR

Move would facilitatecross border listing ofentities with Indian assetsand exits to shareholders/Investors

Key things to watch outwill be notification of

jurisdictions andamendment of tax laws tofacilitate such crossborder mergers




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Cross border merger

Contractual

mergers


company

Treasury stock

Others

Contractual mergers

The Bill provides that the following mergers may be undertaken without theapproval of Tribunal:

Merger between small companies (private companies meeting prescribedcapital/ turnover); or

Merger between holding company and its 100% subsidiary; orMerger between other class or classes of companies as may be prescribed

The scheme would be required to be sent to the Registrar of Companies ( RoC )and the Official Liquidator (OL)

The scheme is then considered in the meeting of shareholders and creditors andshould be approved by the shareholders (holding 90% of total number of shares)and creditors (majority in number representing 9/10th in value)

Post approval of the scheme by the shareholders and creditors, the same is filedwith the OL, RoC and the Central Government (ie the Department of Company

Affairs (DCA)) if the OL or the RoC have no further objections, the scheme isregistered by the DCA




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Cross border merger

Contractual mergers

Merger with

unlisted company

Treasury stock

Others

Merger with unlisted company

On merger of a listed company into an unlistedcompany, the unlisted company can remainunlisted provided shareholders of the merginglisted company are given an exit opportunity

Option provided to shareholders of listed entity toopt out of the unlisted company upon payment ofcash/other benefits determined in accordance witha pre-determined price formula or valuation report


Technically, such atransaction is possible

even under the Act(recent precedents

include Wipro Ltd. andSundaram Clayton Ltd)



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Cross border merger

Contractual mergers


company

Treasury stock

Others

Treasury stock

Bill creates a restriction on the transferee company fromholding shares in its own name or in the name of a trust.Any inter-company investments between the companiesinvolved in merger, would need to be cancelled

Can treasury stock on behalf of shareholders be created?Existing treasury stock required to be unwound?


Treasury stockwas used by listed

companies for

raising funds/managingprofitability



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Cross border merger

Contractual mergers


company

Treasury stock

Others

Others

An arrangement can include a takeover offer, subject tocompliance with securities laws regulations in respect oflisted companies

Buyback can also be done as part of the restructuringscheme, subject to compliance with buyback provisionsunder Clause 68


May not bepossible to exceedlimits specified for

buybacks by

undertaking abuyback under a

scheme ofarrangement



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Procedural changes

for a Scheme of

Arrangement

Procedural changes

Notice of meeting for the scheme to be sent to the CentralGovernment (i.e Regional Director, DCA, ROC, OL, Income -tax authorities, RBI, SEBI, Competition Commission of India(CCI) and other sectoral regulators for comments within 30

days in case no representation within 30 days, deemedapproval

Swap report, undertaken by registered valuers, provided toshareholders & creditors

Meeting of creditors can be dispensed with if creditors holding90% agree

Objections to scheme can be made only by shareholders

holding 10% shareholding or creditors holding 5% of totaloutstanding debt

All companies will have to obtain statutory auditors certificatefor compliance with accounting standards

Shareholders/Creditors will have the option to vote for thescheme through postal ballot


Timelines fora restructuring

exercisewould be clear

postnotification of

the rules



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M&A - CASH REPATRIATION

Buy back Capital reduction Dividend


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CASH REPATRIATION (1/3)

Buy back

Capital reduction

Dividend

Buy back

Bill provides for a minimum 1 year gap between twobuybacks

Buyback is not possible in case of following defaults,

unless the defaults have been remedied and threeyears have passed:

Repayment of deposit/ interest payable

Redemption of debentures or preference shares

Payment of dividend

Repayment of any term loan or interest

Buy back Capital reduction

Limited buybackspossible due to 1year gap. Further

impacts (post

introduction ofbuyback tax) the

use of buyback asa cash repatriation

strategy

Dividend



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CASH REPATRIATION (3/3)

Buy back

Capital reduction

Dividend

Dividend

Transfer to reserves not mandatory, left to thediscretion of companies

No declaration of dividends on non-compliance with

the provisions for acceptance and repayment of publicdeposits

Where a company has incurred losses in the currentFY till the preceding quarter, Interim dividend cannotexceed the average rate of dividends declared by thecompany during the immediately preceding 3 financial

years

No locking of fundsin general reserve.Increase in pre-taxdistributable profitson account of nontransfer of 2.5% -10% of profits to

reserves

Buy back Capital reduction Dividend



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M&A - INVESTOR PROTECTION

Class Acton Suits Entrenchment Shareholder pacts Squeeze-outs


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INVESTOR PROTECTION (1/3)

New concepts

Class Action Suits

Entrenchment

Shareholder pacts

Class Action suitsNew provisions relating to class action suits introduced

Framework laid down enabling members or depositors to approach the Tribunaldirectly in case of oppression or mismanagement

Suit can be filed against:

The Company itself;

Its directors;

Auditor, including the audit firm; or

Any expert, advisor or consultant.

For seeking damages

In order to mitigate the risk to frivolous suits, minimum applicant size prescribed

Does not apply to banking companies

Squeeze-outs



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New concepts Squeeze-outs

Class Action Suits

Entrenchment

EntrenchmentEntrenchment provisions, hitherto commercially used but not explicitly providedunder corporate law, introduced

Articles of Association can contain entrenchment provisions

Entrenchment provisions may contain provisions that are more stringent than theprovisions under law



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New concepts

Minority stake

Price

Squeeze-outs

Where persons or a group of personsacting in concert hold 90% or more stakein a Company, they shall notify theCompany of their intention to buy theremaining stake

The price to be paid for the balance stakeshall be determined by a registered valuerin accordance with prescribed rules

Squeeze-outs

Enables exit opportunity forminorities at a reasonablydeterminable price

Aims to reduce long drawn

litigation in consolidation ofstake by majority

Dissenting minority mustalso be given an exit option ifin a public issue the companychanges the purpose for which

capital was raised

No provisions for a mandatorysqueeze out in case thepromoters reach a particularthreshold




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OTHER M&A RELATED

Sickness Sale of an undertaking Multi layered structures

Preference Shares Holding Company Inter-se arrangements


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OTHER M&A RELATED (1/4)

Sickness

Sale of an

undertaking

Multi-layered

Preference Shares

Holding Company

Inter-se

arrangements

Sickness

Provisions now cover any company instead ofindustrial company. Net worth criteria (erosion of

50% of net worth) for sickness dispensed

Revised criterion is inability to pay 50% of outstandingsecured debt within 30 days of service of notice

Scheme of revival and rehabilitation should beapproved by both secured creditors (holding 75%value) and unsecured creditors (holding 25% value) else, Tribunal can order winding up of the company.

Interests ofunsecured creditorsand other claimants

are not equallyprotected

Sickness Sale of an undertaking Multi-layered




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OTHER M&A RELATED (3/4)

Sickness

Sale of an

undertaking

Multi-layered

Preference Shares

Holding Company

Inter-se

arrangements

Multi-layered structures

The Bill prohibits multi-layered investment structurewherein investment is not permitted through more

than 2 layers of investment companies

However, overseas multi-layered structure ispermitted

Move mayimpact ability to raise

funds

Existing structures tobe un-wound?

Sickness Sale of an undertaking Multi-layered


Preference Shares

Companies can issue preference shares for a periodexceeding 20 years for specified infrastructureprojects

Certain percentage of shares are redeemed annuallyat the option of the shareholder



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IV. CLOSING REMARKS AND Q&A


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SPEAKERS PROFILE


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VIVEK GUPTA

E: [email protected]: +91 124 339 5052

Vivek is a Partner in the firms Mergers and Acquisitions practice. He specializes intransaction tax and restructuring and also leads the vertical in the firm. Vivek has playeda key role in the establishment of the corporate finance practice of the firm and theemergence of BMR as a leading M&A transaction advisor in the mid-market space.

He has over 18 years of experience across corporate mergers and acquisitions andprivate equity transactions as well as business re-organizations, domestic as well asmulti-jurisdictional, having participated in a number of cross-border and domestictransactions. He has advised a number of large domestic as well as Fortune 500companies on complex transactions across sectors such as media and entertainment,information technology, retail, e-commerce and consumer. Vivek brings a blend ofstrategic, financial, tax & regulatory and commercial skills to such engagements.

He finds mention in the ITR World Tax Guide 2004 and 2007, as a leading advisor onM&A transactions in India. He writes for the financial newspapers and is also a regularcontributor to various current affairs and news shows on the electronic media.

Vivek is a graduate in commerce from the University of Delhi and is a qualified CharteredAccountant.



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E: [email protected]: +91 124 339 5023

RAJENDRA NALAM

Rajendra is a Partner in the firms Mergers & Acquisitions practice. With a specialisationin the Infrastructure and Media & Entertainment sectors, he has over 13 years ofexperience working with a variety of foreign companies in strategizing and executingtheir expansion into India- including opportunity assessments, organic growth plans aswell as acquisition oriented structures.

Rajendra blends his deal experience with a deep understanding of local tax, securitieslaws & regulatory issues to deliver holistic advice. He also works with a large number ofdomestic companies in relation to their acquisition, reorganization and capital raisingefforts.

In the course of his experience at BMR and other Big 4 firms, he has helped Indiancompanies design and implement complex transactions on an end to end basis includingrestructuring projects, growth plans, repatriation exercises and divestments.

He is a graduate in Economics from the University of Delhi and a qualified CharteredAccountant



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This presentation has been prepared for clients, EBG, NFTC and USCIB members and

Firm personnel only. The presentation is meant for general guidance and noresponsibility for loss arising to any person acting or refraining from acting as a result ofany material contained in this presentation will be accepted by BMR Advisors. It isrecommended that professional advice be sought based on the specific facts andcircumstances. This presentation does not substitute the need to refer to the originalpronouncements

Disclaimer



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C h a l l e n g e U s

presentation on companies bill aug 26

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