Friday, November 16, 2012

The provision and the proposition - Section 399 of the Companies Act, 1956

Provision

Section 399 of the Companies Act, 1956 states that a person holding not less than 10% of the issued share capital of the Company or who constitutes not less than one-tenth of the total number of members of a company is entitled to applying to Company Law Board praying for necessary action / relief against cases of oppression and mismanagement. The provision is very simple and clear. If a person does not hold even 10% of issued capital of the company, he / she cannot approach for relief in respect of cases of oppression and mismanagement.

Proposition

Though at the time of presenting a petition under Sections 397 and 398 of the Companies Act, 1956, the Petitioner or Petitioners may not be holding the minimum number of shares as prescribed under Section 399 of the Act entitling them to be eligible to maintain a petition under those sections, they could still maintain their petition if the reason for their holding shares less than the minimum eligibility qualification under Section 399 of the Act is actually the or one of the acts of oppression. For instance a particular transfer or allotment or refusal to allotment or refusal to register a share transfer could be a matter or one of the matters under challenge in the petition filed by them. In such case, the Company Law Board cannot throw their petition as a preliminary issue.

The Precedent


In Mr. Vijayan Rajes and Others v M.S.P. Plantations Private Limited and Others, ILR 2009 KAR 3576, the Karnataka High Court held in its decision on 12/08/2009 that for the purpose of examining as to whether the petitioning members qualify for maintaining a petition under Section 399 of the Act, the question to be looked into is as to whether the petitioners constitute the requisite number of members or they had the requisite shareholding in the company prior to the acts complained of. If the date of presentation of the petition should be looked into in a technical way, it could defeat the very purpose of the legislative enactment of Sections 397 and 398 of the Act, as the overbearing majority shareholders can simply by highhanded action or even for other purpose and by oppressive methods, dismember minority shareholders and leave them with no remedies, as the dismembered minority shareholders technically do not qualify for maintaining a petition under Section 399 of the Act, being not member at all. As the minority shareholders will be complaining only after the acts occurred and when they have been removed from the membership of die company, the understanding and interpretation to be given to Section 399 is only so as to advance the object of relief to be given in a situation governed by Sections 397 and 398 of the Act and not to foreclose the options to an aggrieved person and to deny the very relief sought to be extended to a complaining minority shareholder/s envisaged under Sections 397 and 398 of the Act.

 

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Thursday, July 12, 2012


Share Transfer Registration by Listed Companies

The Securities and Exchange Board of India [SEBI], India's top regulator for capital markets slashes the time lines for registering the transfer of shares to 15 days. What was 30 days until now, has become 15 days and Listed Companies have to be on their toes as any delay will enable the investor concerned to claim compensation by way of damages for opportunity losses suffered by investors due to delay in adhering to this time limit. this reduction was made by SEBI in consultation with Registrars Association of India called RAIN! This reduced time limit applies to debt securities too. Accordingly listing agreement for equity shares, listing agreement for SME Sector and Listing Agreement for debt securities have all been amended!


It rains in favour of the investors while compliance officers would face the music!


Refer SEBI Circular CIR/MIRSD/8 /2012 dated July 05 , 2012 


KSR
CHARGES - Condoning Delay in Filing Particulars of CHARGES

The powers of the Company Law Board [CLB] under Section 141 of the Companies Act, 1956 to condone delay in and extend the time limit for filing of particulars of charges and modifications thereof are going to shifted to Regional Directors [RDs] in the Ministry of Corporate Affairs [MCA]. This marks the beginning of a new era in this matter. Most of the cases requiring extension of time are very ordinary procedural matters where a company might default in filing particulars of charges within 30 days of its creation or modification and end up in moving the CLB with a Petition. Effective from 12th August 2012, these powers are going to be exercised by RDs. 

MCA may make this exercise still more simple by prescribing in the Rules, the filing of Form No.8 with RoC being automatically routed with RoC's report to RD and upon determination and notification of fee by RD and payment by Company, RoC may proceed to register the charge or modification of charge. This will be a better way of handling these jobs in GREEN ERA. However RDS will have the power to fix up a hearing and summon parties to seek explanations and clarifications on a case to case basis if the issues are complicated.

KSR


Shifting of Registered Office - Better to do after a month; save a couple of months!


If you are about to start compliance formalities for shifting of registered office from one state to another in India, you would be better by waiting for a month as 12th August 2012 will be the beginning of these confirmation powers being vested on the Central Government [CG] and Company Law Board [CLB] will no longer have the powers to do anything with respect to shifting of registered office. Presently under the Companies Act, 1956, if a company having its registered office in one State intends to move it to another State, such a move requires, apart from a special resolution [a resolution of shareholders enjoying three fourths of the votes polled], a confirmation from CLB. For this purpose, petition should be filed in accordance with CLB Regulations. This process will take normally about 3 to 4 months. However with the 10th July 2012 notifications of CG [to be precise, the Ministry of Corporate Affairs], the power to confirm the shifting of registered office will get transferred to Regional Directors. Wait and Watch!

KSR

Wednesday, April 11, 2012

Company Secretary and Law: GOVERNMENT ALLOWS FDI IN LLPs

Company Secretary and Law: GOVERNMENT ALLOWS FDI IN LLPs: The new FDI Policy of the Government of India which came into force from 10th April 2012 does not show any change in the FDI policy as regar...

GOVERNMENT ALLOWS FDI IN LLPs

The new FDI Policy of the Government of India which came into force from 10th April 2012 does not show any change in the FDI policy as regards Limited Liability Partnerships. In sectors where 100% FDI is allowed, LLPs are also entitled to receive 100% FDI. However the sectors where such permission is allowed subject to certain conditions, FDI in an LLP that is operating / intends to operate in such a sector will not be availabe under the automatic route. FDI is not allowed in LLPs in agricultural / plantation or real estate sectors. While a company entitled to receive FDI may undertake the activity concerned through a down stream LLP, an LLP permitted to receive FDI is not allowed to carry on that activity through any other down stream entity, say an LLP or a company. In other words, so far as FDI is concerned, for the present the Government does not seem to be inclined in allowing a holding company type of structure for LLPs.

Saturday, February 25, 2012

Corporate Crimes - Liabilities of Directors and the Company

Directors of a company take decisions collectively. Of course, some Directors and officers are entrusted with the responsibility of managing the day-to-day affairs of the Company. Contravention of any provision of an applicable law creates a criminal offence. Knowingly or unknowingly, Directors and officers become liable to bear the consequences of such offences. Where the default is wilful or offences occur knowingly, Directors and officers have no other go except to undergo the punishment prescribed in the relevant laws or rules or regulations. However if such offences occur due to their ignorance or negligence, the pain will be more. Therefore it is essential to look at the penal provisions under various economic legislations so as to understand not only the liability of the Directors and officers but also that of the company for the acts of its Directors and officers.

Very recently in a grave matter pertaining to a corporate hospital in Kolkata by name AMRI, where over 90 people suffocated to death in the December 9, 2011 fire tragedy, 9 Directors and four employees were arrested, of whom only an octogenarian director [in whose name the hospital's license was given], was granted bail by a lower court on medical grounds and due to his age. On Friday, the 17th February 2012, the Calcutta High Court had granted bail to another senior director who had pleaded that he had not attended any board meeting of this Company at all in 2011. The offence involving criminal negligence has reportedly arisen from blatant flouting of building rules and fire safety norms.


It is generally accepted proposition that when Directors of a company discharge their duties as per the responsibility undertaken by them / entrusted with them, they are supposed to be acting for on and behalf of the company. Therefore such acts are deemed to be acts of the company itself. In such situations, company is deemed guilty and is usually held vicariously liable though but for such notional extension of liability, it is agreed that a company can act only through natural persons and therefore cannot be held vicariously liable for the acts of commission and omission by its Directors and officers.


Offences involving criminal liability are supposed to be best avoided by taking appropriate measure (a) to understand the applicable provisions of law and compliance requirements therein; (b) to appoint a particular officer and entrust with him the responsibility for compliance; (c) to review the compliance system periodically; (d) to note amendments and legislative changes and new laws, rules and regulations applicable to the business of the company; and (e) to ensure that an external company secretary with requisite experience and expertise carries out an audit of compliances in the form of a compliance management audit so that gaps could be sealed and future complications could be avoided.

Sunday, January 15, 2012

Company Secretary and Law: Valuation of Sweat Equity Shares - Only Merchant ...

Company Secretary and Law: Valuation of Sweat Equity Shares - Only Merchant ...: Under the Income Tax Act, a special provision exists with regard to the valuing of benefit to an employee who is recipient of SES. Sub-claus...

Valuation of Sweat Equity Shares - Only Merchant Banker Could Value even for UNLISTED companies

Under the Income Tax Act, a special provision exists with regard to the valuing of benefit to an employee who is recipient of SES. Sub-clause (vi) of clause (2) of Section 17 of the Income Tax Act, 1961 provides that SES is a “Perquisite”. The value of SES shall be the ‘Fair Market Value’ determined in accordance with the method prescribed under the Income Tax Rules, 1962. Rule 3 of those Rules contains the method of determination of ‘Fair Market Value’. Separate methods have been given for Listed Companies and Unlisted Companies. 


It would be interesting to note that even in respect of Unlisted Companies, ‘Fair Market Value’ of SES should be determined only by Category 1 Merchant Banker.

Company Secretary and Law: sweat equity shares - intangible assets and value ...

Company Secretary and Law: sweat equity shares - intangible assets and value ...: 1. Section 79A of the Companies Act, 1956 [the Act] permits a company to issue a “Sweat Equity Shares” [SES] of a class of share...

sweat equity shares - intangible assets and value addition

1.            Section 79A of the Companies Act, 1956 [the Act] permits a company to issue a “Sweat Equity Shares” [SES] of a class of shares already issued subject to certain conditions.
2.            In respect of a listed company the Securities and Exchange Board of India [SEBI] has issued the SEBI [Issue of Sweat Equity] Regulations, 2002 [SEBI Regulations].
3.            In respect of unlisted companies, the Ministry of Corporate Affairs [MCA] had issued the Unlisted Companies (Issue of Sweat Equity Shares) Rules, 2003 [MCA Rules].
4.            Section 79A of the Act, states by way of an Explanation “SES” means Equity Shares issued by a Company to its ‘Employees’ or ‘Directors’ at a Discount or for a consideration other than cash for providing know–how or making available rights in the nature of intellectual property rights or value additions by whatever name called. Therefore whether SES are issued by a Listed Company or an Unlisted Company, they are supposed meet the purpose and nature specified in the Explanation under Section 79A of the Act.
5.            As Section 79A of the Act clearly states that a company may issue SES of a ‘Class of Shares’ already issued, it would mean that the Equity Shares that are proposed to be issued as SES have to be either Equity Shares with voting rights or Equity Shares with differential rights as to be dividend, voting or otherwise.
6.            Under the MCA Rules, as “Intangible Asset” means “an identifiable non-monetary asset, without physical substance held for use in the production or supply of goods or services, for rental to others, or for administrative purposes”. MCA Rules define a “Value Addition” as “an anticipated economic benefits derived by the enterprises  from expert and/or professional for providing know-how or making available rights in the nature of intellectual property rights, by such person to whom SES are being issued for which the consideration is not paid or included in -
a.    The normal remuneration payable under the contract of employment in the case of an employee and/or;
b.    Monetary consideration payable under any other contract, in the case of non-employee”.