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Alerts:

Regulatory Alert: Amendments to the Companies (Share Capital and Debentures) Rules, 2014

22 August 2019

The Ministry of Corporate Affairs (‘MCA’) on 16 August 2019 has notified Companies (Share Capital and Debentures) Amendment Rules, 2019 (‘the amended rules’) to make certain amendments to the Companies (Share Capital and Debentures) Rules, 2014 (‘the existing rules’) pertaining to shares with differential voting rights, issuance of ESOPs by start-up companies, maintaining of Debenture Redemption Reserves (‘DRR’) by several class of Companies.

The key highlights of notification[1] are summarised below.

Amendment to Rule 4 - Equity shares with differential rights:

  • The existing rules permits the issue of equity shares with differential rights subject to a condition that the shares with differential rights should not exceed 26% of total post-issue paid up equity capital of the Company at any point of time. This limit is now changed to 74% of the total voting power including voting power in respect of equity shares with differential rights at any point of time.
  • Further, as per the amended rules, the requirement of having a track record of distributable profits for previous three years for issue of equity shares with differential rights has been done away with. 

Amendment to Rule 5 – Certificate of Shares (where shares are not in DEMAT form):

  • As per the existing rules, the Directors were permitted to sign a share certificate through various means such as facsimile signature etc. However, as per the amended rules, the Company Secretary is also permitted to sign the share certificate in the similar manner.

Amendment to Rule 12 – Issue of Employee Stock Options:

  • As per the existing rules, the start-up companies were allowed to issue ESOPs to “employees” as mentioned below till the period of “five years” from the date of its incorporation or registration: 
  1. A promoter or a person belonging to the promoter group; or
  2. A director who either himself or through his relative or through any body corporate, directly or indirectly, holds more than ten percent of the outstanding equity shares of the company.

Now as per the amended rules, the start-up companies can issue ESOPs to such employees for the period of “ten years” from the date of its incorporation or registration.

Also, the definition of start-up companies has now been expanded to include following:

  • An entity which is a private Company or registered partnership firm or registered limited liability partnership for up to period of ten years from its incorporation / registration; and
  • Having turnover up to INR 100 crores for any of the financial years since incorporation/ registration; and
  • Entity is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.

Provided that an entity formed by splitting up or reconstruction of an existing business shall not be considered a “start-up”.

Amendment to Rule 18 – Debentures:

  • As per the amended rules, the requirement of creating DRR by certain class of companies has been done away with. The synopsis of amendments in DRR provisions and comparison of the amended rules vis a vis the existing rules are presented in the table under: 

Sr. No.

Class of Companies

As per the existing rules

As per the amended rules

1.

All India Financial Institutions regulated by Reserve Bank of India (RBI) and Banking Companies

Public Issue:

No DRR required

Private Issue:

No DRR required

DRR provisions same as provided in the existing rules  

2.

Other Financial Institutions as per Section 2(72) of the Companies Act, 2013

DRR provisions will be applicable as applicable to NBFCs registered with RBI

DRR provisions same as provided in the existing rules 

3.

For listed companies (other than All India Financial Institutions and Banking Companies as specified in serial no. 1 above)

a.

All listed NBFCs and listed HFCs 

Public Issue:

DRR was 25% of the value of the outstanding debentures issued through public issue

Private Issue:

No DRR required

Public Issue:

No DRR required

Private Issue:

No DRR required

b.

Other listed companies

Public Issue:

DRR was 25% of the value of the outstanding debentures issued

Private Issue:

DRR was 25% of the value of the outstanding debentures issued

Public Issue:

No DRR required

Private Issue:

No DRR required

4.

For unlisted companies (other than All India Financial Institutions and Banking Companies as specified in serial no. 1 above)

a.

All unlisted NBFCs and unlisted HFCs

Public Issue [as per SEBI (Issue and Listing of Debt Securities) Regulations, 2008]:

DRR was 25% of the value of the outstanding debentures issued

Private Issue:

No DRR required

Private Issue:

No DRR required

 

b.

Other unlisted companies

Public Issue [as per SEBI (Issue and Listing of Debt Securities) Regulations, 2008]:

DRR was 25% of the value of the outstanding debentures issued

Private Issue:

DRR was 25% of the value of the outstanding debentures issued

DRR shall be 10% of the value of the outstanding debentures issued

 

 

  • Further, under the existing rules, every company which was required to create DRR, had to invest or deposit on or before the 30th day of April in each year, at least 15% of the amount of its debentures maturing during the year ending on the 31st day of March of the next year in a separate fund recognized as Debenture Reserve Fund (‘DRF’).

However, as per the amended rules, only certain types of companies are required to invest or deposit such amount. The list of such companies required to invest in DRF is as below:

  1. All listed NBFCs registered with Reserve Bank of India;
  2. All listed HFCs registered with National Housing Board;
  3. All other listed companies (other than All India Financial Institutions, Banking Companies and Other Financial Institutions); and
  4. All unlisted companies which are not NBFCs and HFCs

BDO Comments:

  • The amended rules have brought much required clarity on the limit on voting power upto which a Company can issue equity shares with differential voting rights.
  • Further, the amendment has not only enlarged the types of entities that will now qualify under category of start-ups but also provide relaxation to such start-ups by increasing the turnover limit and the period of years upto which they can be considered as start-ups.
  • The amendment has also done away with the requirement to create DRR for listed companies and have also reduced the threshold of DRR for unlisted Companies. However, on the flip side, the amended rules make it mandatory for listed company to invest in DRF even though DRR is not applicable for them. Further it would have been helpful if clarity was provided with respect to DRR requirement for unlisted NBFCs and unlisted HFCs in case of public issue of debentures.
  • The amendments provided in the notification have come into force from 16 August 2019.