Newsletter | October 2019

This newsletter aims to briefly discuss the key corporate law (Companies Act, 2013, Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 and Foreign Exchange Management Act, 1999) developments during the period of October 01, 2019 – October 31, 2019.

Resignation of statutory auditors from listed entities and their material subsidiaries The Securities and Exchange Board of India (“SEBI”) vide its circular No. CIR/CFD/CMD1/114/2019 dated October 18, 2019 (“Circular”) has expanded upon the compliances and timely disclosures More... Resignation of statutory auditors from listed entities and their material subsidiaries The Securities and Exchange Board of India (“SEBI”) vide its circular No. CIR/CFD/CMD1/114/2019 dated October 18, 2019 (“Circular”) has expanded upon the compliances and timely disclosures to be made by listed entities and their material subsidiaries including their statutory auditors in relation to the resignation of the statutory auditors for enabling the investors to take informed investment decisions. According to SEBI, resignation of a statutory auditor from a listed entity and/or its material subsidiary before completion of the audit of the financial results for the year due to reasons such as pre-occupation may seriously hamper investor confidence and deny them access to reliable information for taking timely investment decisions. In light of the above, SEBI has prescribed the conditions to be complied with upon resignation of the statutory auditor of a listed entity and/or its material subsidiary with respect to the limited review / audit report as per SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“SEBI (LODR) Regulations”), which are as under: All listed entities/material subsidiaries to ensure compliance with the following conditions while appointing/re-appointing a statutory auditor: In the event the statutory auditor resigns within 45 (forty-five) days from the end of a quarter of a financial year, the statutory auditor, before such resignation, is required to issue the limited review/ audit report for such quarter. In the event the statutory auditor resigns after 45 (forty-five) days from the end of a quarter of a financial year, the statutory auditor, before such resignation, is required to issue the limited review/ audit report for such quarter as well as the next quarter. Notwithstanding the above, in the event the statutory auditor has signed the limited review/ audit report for the first three quarters of a financial year, then the statutory auditor, before such resignation, is required to issue the limited review/ audit report for the last quarter of such financial year as well as the audit report for such financial year.   Other conditions relating to resignation shall include: Reporting of concerns with respect to the listed entity and/or its material subsidiary to the Audit Committee or the Board of Directors where such entity is not mandated to have an Audit Committee: In case of any concern with the management of the listed entity and/or its material subsidiary such as non-availability of information / non-cooperation by the management which may hamper the audit process, the auditor is required to approach the Chairman of the Audit Committee of such listed entity and the Audit Committee shall receive such concern directly and immediately without specifically waiting for the quarterly Audit Committee meetings. In case the auditor proposes to resign, all concerns with respect to the proposed resignation including non-receipt of information / explanation from the company, along with relevant documents are required to be brought to the notice of the Audit Committee. In the event that the listed entity and/or its material subsidiary does not provide the information required by the auditor, the auditor is required to provide an appropriate disclaimer in the audit report in accordance with the Standards of Auditing as specified by Institute of Chartered Accountants of India / National Financial Reporting Authority. The listed entity and/or its material subsidiary is required to ensure that the above conditions are included in the terms of appointment of the statutory auditor at the time of appointing/ re-appointing of the auditor and such listed entity and/or its material subsidiary is required to obtain information from the auditor upon resignation in the format as specified in the Circular. Further, in case the auditor is rendered disqualified due to operation of any condition mentioned in Section 141 of the Companies Act, 2013 (“Companies Act”), then the provisions of this Circular shall not apply. Link Legal Insights: The Circular inter alia will ensure that, (i) a company is not left in limbo wherein the auditor simply resign citing “personal reasons” for quitting the auditor’s job; (ii) the Chairman of the Audit Committee of such listed entities are aware in case of any concern with the management of the listed entity and/or its material subsidiary which leads to the resignation of such auditors. Additionally, the Circular also provides that an auditor is mandatorily required to issue a limited review report even if they resign along with adequate disclaimers, clearly specifying the reasons for the resignation, which will inter alia assist investors in their decision-making process and provide them with information in relation to the concerned entity. Less... Framework for issue of Depository Receipts SEBI vide its circular No. SEBI/HO/MRD/DOP1/CIR/P/2019/106 dated October 10, 2019 has inter alia stated that only ‘a company incorporated in India and listed on a Recognized Stock Exchange in India’ (‘Listed Company’) may issue Permissible Securities (as defined hereinafter), for the purpose of issue of Depository Receipts (‘DRs’), subject to various compliances provided under such circular. More... Framework for issue of Depository Receipts SEBI vide its circular No. SEBI/HO/MRD/DOP1/CIR/P/2019/106 dated October 10, 2019 has inter alia stated that only ‘a company incorporated in India and listed on a Recognized Stock Exchange in India’ (‘Listed Company’) may issue Permissible Securities (as defined hereinafter), for the purpose of issue of Depository Receipts (‘DRs’), subject to various compliances provided under such circular. Eligibility criteria provided in the circular inter alia are: A Listed Company is required to be in compliance with the requirements prescribed under SEBI (LODR) Regulations and any amendments thereof.   A Listed Company is eligible to issue Permissible Securities, for the purpose of issue of DRs, if: the Listed Company, any of its promoters, promoter group or directors or selling shareholders are not debarred from accessing the capital market by SEBI; any of the promoters or directors of the Listed Company is a promoter or director of any other company which is not debarred from accessing the capital market by SEBI; the Listed Company or any of its promoters or directors is not a wilful defaulter; and any of its promoters or directors is not a fugitive economic offender.   Existing holders are eligible to transfer Permissible Securities, for the purpose of issue of DRs, if: the Listed Company or the holder transferring Permissible Securities are not debarred from accessing the capital market by SEBI; the Listed Company or the holder transferring Permissible Securities is not a willful defaulter; and the holder transferring Permissible Securities or any of the promoters or directors of the Listed Company are not a fugitive economic offender. Further, Listed Company is permitted to issue Permissible Securities or transfer Permissible Securities of existing holders, for the purpose of issue of DRs, only in Permissible Jurisdictions and said DRs shall be listed on any of the specified international exchange(s) of the Permissible Jurisdiction. ‘Permissible Securities’ mean equity shares and debt securities, which are in dematerialized form and rank pari passu with the securities issued and listed on a Recognized Stock Exchange. ‘Depository Receipts’ mean a foreign currency denominated instrument, listed on an international exchange, issued by a foreign depository in a Permissible Jurisdiction (as defined hereinafter) on the back of Permissible Securities issued or transferred to a domestic custodian and includes ‘Global Depository Receipt(s) (“GDRs”)’ as defined in section 2(44) of the Companies Act. ‘Foreign Depository’ means a person which: (a) is not prohibited from acquiring Permissible Securities; (b) is regulated in any of the Permissible Jurisdiction as defined in this circular; and (c) has legal capacity to issue DRs in the Permissible Jurisdiction where issue of DRs is proposed. ‘Permissible Jurisdiction’ shall mean jurisdictions as may be notified by the Central Government from time to time, pursuant to notification no. G.S.R. 669(E) dated September 18, 2019 in respect of sub-rule 1 of rule 9 of Prevention of Money-Laundering (Maintenance of Records) Rules, 2005. Link Legal Insights: This circular provides a framework for the issuance of DRs, which will enable Indian companies to gain access to foreign capital markets through American Depository Receipts (ADRs) and Global Depository Receipts (GDRs), however the "Permissible Jurisdictions" and "international exchanges" on which the DRs of such Listed Company may be issued  have not been notified yet. This circular will help reduce the uncertainty in relation to the regulations surrounding DRs and help promote Listed Company in international markets whereby such Listed Company will now consider DRs as a feasible option for raising funds or to provide exit to its existing shareholders. Less... Amendment to Corporate Social Responsibility provisions of the Companies Act The Ministry of Corporate Affairs (“MCA”) vide notification number G.S.R. 776(E) dated October 11, 2019 has amended Schedule VII of the Companies Act which has come into force with effect from October 11, 2019 in order to elaborate inter alia the approved contributions which may be included by companies in their Corporate Social Responsibility (“CSR”) Activities. More... Amendment to Corporate Social Responsibility provisions of the Companies Act The Ministry of Corporate Affairs (“MCA”) vide notification number G.S.R. 776(E) dated October 11, 2019 has amended Schedule VII of the Companies Act which has come into force with effect from October 11, 2019 in order to elaborate inter alia the approved contributions which may be included by companies in their Corporate Social Responsibility (“CSR”) Activities. According to the amendment notification, in the said Schedule VII, for item (ix) and the entries relating thereto, the following item and entries shall be substituted:“(ix) Contribution to incubators funded by Central Government or State Government or any agency or Public Sector Undertaking of Central Government or State Government, and contributions to public funded Universities, Indian Institute of Technology (IITs), National Laboratories and Autonomous Bodies (established under the auspices of Indian Council of Agricultural Research (ICAR), Indian Council of Medical Research (ICMR), Council of Scientific and Industrial Research (CSIR), Department of Atomic Energy (DAE), Defence Research and Development Organisation (DRDO), Department of Science and Technology (DST), Ministry of Electronics and Information Technology (MEITY) engaged in conducting research in science, technology, engineering and medicine aimed at promoting Sustainable Development Goals (SDGs); Link Legal Insights: This MCA notification provides clarity on the contributions which can be made by companies as part of their CSR initiative and specifically lists down several organizations to which contributions can be made. Less... E-form DIR 12 for ACTIVE-non-compliant company & Shifting of Registered Office within the same State MCA vide notification dated October 16, 2019 has amended inter alia Rule 25A and Rule 28 of the Companies (Incorporation) Rules, 2014. More... E-form DIR 12 for ACTIVE-non-compliant company & Shifting of Registered Office within the same State MCA vide notification dated October 16, 2019 has amended inter alia Rule 25A and Rule 28 of the Companies (Incorporation) Rules, 2014. Rule 25A – E-form DIR 12 for ACTIVE-non-compliant company Vide the said notification, in addition to the case of cessation of any director, an ACTIVE-non-compliant company can also file Form DIR-12 in the following cases: appointment of directors in such company where the total number of directors is less than the minimum number {i.e. 2 (two) in case of private company and 3 (three) in case of public company} on account of disqualification of all or any of the directors under Section 164 of the Companies Act; appointment of any director in such company where DINs of all or any of its director(s) have been deactivated; appointment of director(s) for implementation of the order passed by the Court or NCLT or NCLAT under the provisions of the Companies Act or under Insolvency and Bankruptcy Code, 2016. Rule 28 – Changes in timeline for passing of order by Regional Director (“RD”) Vide the said notification, new timelines have been prescribed for passing the order by the RD in case of shifting of registered office from one jurisdiction to another jurisdiction of registrar of companies but within the same State and filing of such order with the concerned registrar of companies, as below: Particulars Previous Law Amendment The RD to examine the application and either approve or reject the application within 30 (thirty) days of the receipt of application within 15 (fifteen) days of the receipt of application The certified copy of order of the RD to be filed in Form No. INC-28 within 60 (sixty) days from the date of receipt of certified copy of the order. within 30 (thirty) days from the date of receipt of certified copy of the order. Link Legal Insights: This MCA notification inter alia provides cases for filing e-form DIR 12 for an ACTIVE non-compliant company and a timeline within which the RD must approve/ reject the application made for shifting of registered office and will reduce delays and hold-backs in such process. Less... Regulations Governing Debt and Non-Debt Instruments under the Foreign Exchange Management Act, 1999 (“FEMA”) On October 17, 2019, the Ministry of Finance notified the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (“New Rules”) and the Reserve Bank of India (“RBI”) notified the Foreign Exchange Management More... Regulations Governing Debt and Non-Debt Instruments under the Foreign Exchange Management Act, 1999 (“FEMA”) On October 17, 2019, the Ministry of Finance notified the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (“New Rules”) and the Reserve Bank of India (“RBI”) notified the Foreign Exchange Management (Debt Instruments) Regulations, 2019 and the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 (“New Regulations”). The New Rules and the New Regulations supersede the Foreign Exchange Management (Transfer of Issue of Security by a Person Resident outside India) Regulations, 2017 (“TISPRO”) and the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018. Few of the key changes brought in by the New Rules and the New Regulations have been enumerated below: Insertion of the definition of ‘equity instruments’, ‘debt instruments’ and ‘non-debt instruments’ in place of ‘capital instruments’ The definition of ‘equity instruments’ is similar to the definition of ‘capital instruments’ as was defined under TISPRO, except for the fact that the following explanation has been deleted: Capital instruments shall include non-convertible/ optionally convertible/ partially convertible preference shares issued as on and up to April 30, 2007 and optionally convertible/ partially convertible debentures issued up to June 7, 2007 till their original maturity. Non-convertible/ optionally convertible/ partially convertible preference shares issued after April 30, 2007 shall be treated as debt and shall conform to External Commercial Borrowings guidelines regulated under Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations, 2000. The deleted explanation has now been modified and ‘non-convertible/ optionally convertible/ partially convertible preference shares’ have been made a part of the definition of hybrid securities, the same has been provided below in point (b).   Debt instruments have been defined as all instruments other than non-debt instruments. Whereas non-debt instruments have been defined as the following instruments, namely all investments in equity instruments in incorporated entities: public, private, listed and unlisted; capital participation in Limited Liability Partnerships; all instruments of investment as recognized in the FDI policy as notified from time to time; investment in units of Alternative Investment Funds (AIFs), Real Estate Investment Trust (REITs) and Infrastructure Investment Trusts (InvIts); investment in units of mutual funds or Exchange-Traded Fund (ETFs) which invest more than fifty per cent in equity; junior-most layer (i.e. equity tranche) of securitization structure; acquisition, sale or dealing directly in immovable property; contribution to trusts; and depository receipts issued against equity instruments.   However, the Ministry of Finance (Department of Economic Affairs) vide notification number S.O.3722(E) dated October 16, 2019, conferred the following as debt instruments: Government bonds; corporate bonds; all tranches of securitization structure which are not equity tranche; borrowings by Indian firms through loans; and depository receipts whose underlying securities are debt securities. Further, all other instruments which are not specified above shall be deemed as debt instruments.   Introduction of the definition of ‘hybrid securities’ The definition of “hybrid securities” have been introduced whereby hybrid securities means hybrid instruments such as optionally or partially convertible preference shares or debentures and other such instruments as specified by the Central Government from time to time, which can be issued by an Indian company or trust to a person resident outside India. However, it is to be noted that the term ‘hybrid securities’ has not been used in the News Rules or the New Regulations other than in the definition section. Hence, there is no clarity on the issuance and treatment of the hybrid securities.   Insertion of ‘mutual funds’ under the definition of ‘investment vehicle’   Mutual funds which invest more than 50% in equity governed by the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 are included under the definition of ‘investment vehicle’ in addition to AIFs, REITs and InvIts.   Issuance of equity instruments against pre- incorporation or pre-operative expenses incurred by non-resident entity A wholly owned subsidiary set up in India by a non-resident entity, operating in a sector where 100% foreign investment is allowed in the automatic route were allowed to issue equity instruments to the said non-resident entity against pre- incorporation or pre-operative expenses incurred by the said non-resident entity up to a limit of 5% of its authorised capital or USD 500,000. However, the requirement of a certificate (as provided below) from the statutory auditor in relation to the amount of pre-incorporation/ preoperative expenses is not provided for in the New Rules: A certificate issued by the statutory auditor of the Indian company that the amount of pre-incorporation/ preoperative expenses against which capital instruments have been issued has been utilized for the purpose for which it was received should be submitted with the Form FC-GPR.  Explanation: Pre-incorporation/ pre-operative expenses shall include amounts remitted to investee company’s account, to the investor’s account in India if it exists, to any consultant, attorney or to any other material/ service provider for expenditure relating to incorporation or necessary for commencement of operations. Hence, we will have to wait and watch if such certificates are required while filing form FC-GPR with the Authorised Dealer Bank. Further, any directions required under the New Rules and the New Regulations would be specified by the RBI in consultation with the Central Government. Link Legal Insights: While the New Rules seek to differentiate between equity instruments, debt instruments and non-debt instruments, it will have to be seen on how the issuance of debt instruments and non-debt instruments will be governed, as a lot of clarifications will be required on the treatment and issuance of such instruments including hybrid securities. Further, the inclusion of the provisions wherein the RBI would have to consult with the Central Government on certain matters are a deviation from TISPRO, and the same would have to be tested in future to ensure all processes are conducted in tandem and in proper manner. Less... Maintenance of Data Bank of Independent Directors and amendment to the Companies (Appointment and Qualification of Directors) Fifth Amendment Rules, 2019 The MCA vide notification number S.O. 3791(E) dated October 22, 2019 amended the Companies (Appointment and Qualification of Directors) Fifth Amendment Rules, 2019 (“Amendment Rules”) and notified the Companies More... Maintenance of Data Bank of Independent Directors and amendment to the Companies (Appointment and Qualification of Directors) Fifth Amendment Rules, 2019 The MCA vide notification number S.O. 3791(E) dated October 22, 2019 amended the Companies (Appointment and Qualification of Directors) Fifth Amendment Rules, 2019 (“Amendment Rules”) and notified the Companies (Creation and Maintenance of Databank of Independent Directors) Rules, 2019 (“Databank Rules”) which requires all existing and future independent directors to apply online to the ‘Indian Institute of Corporate Affairs at Manesar’ (“Institute”) for inclusion of his/her name in an online data bank. This notification shall come into force with effect from December 01, 2019. Databank Rules The Institute is responsible for creating and maintaining the said data bank of persons willing and eligible to be appointed as independent directors (including of individuals already serving as independent directors), and such databank shall be an online databank which shall be placed on the website of the Institute. The information of such persons will be made available to companies required to appoint independent director on payment of fees to the Institute. Further, an individual who is enrolled in the data bank may restrict his/her personal information to be disclosed in the data bank. Further the Institute is required to comply with the following, namely: (a) conduct an online proficiency self-assessment test covering companies law, securities law, basic accountancy, and such other areas relevant to the functioning of an individual acting as an independent director; (b) prepare a basic study material, online lessons, including audio-visuals for easy reference of individuals taking the online proficiency self-assessment; (c) provide an option for individuals to take advanced tests in the areas specified in point (a) and prepare the necessary advanced study material in this respect. Amendment Rules Vide the said notification, for Rule 3 of the Companies (Appointment and Qualification of Directors) Rules, 2014, the following rule shall be substituted. Every Individual: who has been appointed as an independent director in a company as on December 01, 2019 shall, within a period of 3 (three) months from such date, or who intends to get appointed as an independent director in a company after December 01, 2019 shall, before such appointment,   apply online to the Institute for inclusion of his name in the data bank for a period of 1 (one) year or 5 (five) years or for his/ her life-time.   Any individual, including an individual not having DIN, may voluntarily apply to the Institute for inclusion of his name in the data bank.   Every independent director shall submit a declaration of compliance of such inclusion of name in data bank to the board of directors, each time he submits the declaration required under Section 149(7) of the Companies Act.   Every individual whose name is included in the data bank shall pass an online proficiency self-assessment test (score of not less than 60% in aggregate) conducted by the Institute within a period of 1 (one) year from the date of inclusion of his name in the data bank, failing which, his name shall stand removed from the data bank.   An individual who has served for a period of not less than 10 (ten) years as on the date of inclusion of his name in the data bank as director or key managerial personnel (KMP) in a listed public company or in an unlisted public company having a paid-up share capital of Rs 10 crore or more shall not be required to pass the online proficiency self-assessment test.   Every individual, upon expiry of their term of enrolment in the aforesaid data bank and who continues to be an independent director is required to re-apply at the Institute for a further period of 1 (one) year or 5 (five) years or for his/her life-time, within a period of 30 (thirty) days from the date of expiry of the period, failing which, the name of such individual shall stand removed from the data bank of the institute. No application for renewal is required for an individual who has paid the lifetime fees for such enrolment.   The Amendment Rules shall come into force with effect from December 1, 2019 and existing independent directors are required to file an application within 3 (three) months of the commencement date. Link Legal Insights: Creation of a data bank of independent directors will create an immediate and accessible list of prospective independent directors for appointment as per the requirements of each company. The online proficiency self-assessment test covers subjects such as companies law, securities law, basic accountancy and other related subjects. The mandatory test aims to set a threshold in order to filter the qualified and professional directors from the rest. Less... Authors: Nusrat Hassan - Co-managing Partner (nusrat@linklegal.in), Yosham Vardhan - Counsel (yosham.vardhan@linklegal.in), Ankit Agarwal - Senior Associate  (ankit.agarwal@linklegal.in), Neil Lopez - Associate  (neil.lopez@linklegal.in) and Rahil Thakkar (rahil.thakkar@linklegal.in)

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