Category: Corporate And Other Laws

Shareholders’ Agreements are one of the definitive documents in case of an investment in a company. They are full of jargon which is often unintelligible to laymen and promoters signing without understanding them. This Article explains restrictive covenants, put options and veto rights found in Shareholders’ Agreements. It also analyses their validity under the Companies Act, 1956, the 2013 Act and the position for Listed Companies. Lastly, the Article examines the remedies for enforceability of such Agreements.

Introduction

Shareholders’ Agreements are one of the definitive documents which we witness in cases of an investment in a company by a Private Equity Fund, Foreign Direct Investor, etc. A Shareholders’ Agreement contains various restrictive covenants by theexisting promoters of the investee company, which usually are in the form of representations and warranties  as well as promises to do or abstain fromdoing certain acts. These promises are important for the investor to invest in the investee company  since they represent an assurance to him about hisexit route and other rights. One unique feature of Shareholders’ Agreements is that they are full of jargon which is often unintelligible to laymen.

Promoters, usually in a hurry to secure funds, end up signing on the dotted line of the Agreement without fully understanding the true repercussions of the Agreement. It is only later when these clauses materialise into reality that they wake up and smell the coffee but by then it is too late. Through this Article, let us understand better some of the important covenants which one come across in a Shareholders’ Agreement.

Restrictive Covenants

One or more restrictive covenants, such as, First Refusal, Tag Along, Drag Along, Russian Roulette, Texas Shoot-out, Dutch auction rights, etc., are usually found in Shareholders’ Agreement. These are briefly explained below:

(a) Right of First Refusal
This is the most common and easily understood covenant since it is found in the Articles of Association of all Private Companies. In case the Promoters desire to transfer any or all of their shares, the investor will have a Right of First Refusal, popularly called a RoFR, to purchase these shares. The pricing of the RoFR and the terms and conditions of the sale are the same as those that the promoter is offering to the prospective purchaser. In some cases, the promoter may also have a RoFR on the investor’s shares.

(b) Tag Along Rights

Tag along rights mean that if the promoters wish to sell their shares to anyone else, then the investor can tag along with them and offer its own shares. Example, a buyer has agreed to buy 50,000 shares from the promoter @ Rs. 100 per share. If the investor tags along with the promoter then either the buyer buys 50,000 from him also @ Rs. 100 or he buys 25,000 each  from the promoter and the investor. Thus, the investor gets an exit if the promoter gets one. These are also known as piggy back rights since the investor piggy backs on the promoter.

(c) Drag Along Rights

On the other hand, drag along rights mean that if the investor wishes to sell his shares to a third party and if that third party also requires that the promoters should sell their shares, then the investor can drag along the promoters. Example, a buyer has agreed to buy 50,000 shares from the investor @ Rs. 100 per share. If the buyer wishes to buy more share as a pre-condition, then the investor can drag along with him the promoter and in that case the promoter must also sell the same number of shares at the same terms as the investor. Thus, if the buyer wants to buy out the whole company and not just the investor’s stake, then the drag along clause would enable an investor to facilitate such a transaction.

(d) Russian Roulette

Not very popular in India, a Russian Roulette clause means that “you buy me out or I buy you out”. The investor specifies a price at which either the promoter sells to him or buys the investor out. This is often resorted to when there is a deadlock situation.

(e) Texas Shoot Out

A third party is appointed as a Referee. Both the investor and the promoter submit bids to the Referee. Whichever is the higher bid wins and the winner must buy out the loser at that price. This is an extreme deadlock resolution mechanism.

(f) Dutch auction

A modification of the Texas Shoot out, in a Dutch auction also bids are submitted to a Referee. Only in this case the bids are for the minimum selling price. The winner must buy out the loser at the price quoted by the loser.

(g) Pre-emptive Rights

The investor has pre-emptive rights to participate in any future issuance (other than the current round) of equity (and other instruments convertible into equity) by the company on terms and at a price determined by the company but not less favourable than those offered by the company to any other investor, to retain its fully diluted equity shareholding in the company. The investor has a 20% stake in a company which has a capital of 1 crore shares. The company decides to increase its share capital by a further issue of 20 lakh shares. The investor must be offered 4 lakh shares out of this further issue so that it can maintain its holding of 20% in the post-issue capital of the company.

(h) Put Option

The investor has a right /option but not an obligation to sell its shares to the promoter of the investee company in case the company does not give it an exit in the form of an IPO /an Offer for Sale/Buyback of the investor’s shares. Thus, the promoters are bound to buy out the investor at a predetermined  price or a pricing formula whichis specified upfront. This ensures an exit for the investor if all other methods fail.

The Supreme Court has recognised such rights in its decision in celebrated decision of Vodafone International Holdings, 341 ITR 1 (SC) and held as under:

“SHA, therefore, regulate the ownership and voting rights of shares in the company including ROFR, TARs, DARs, Preemption Rights, Call Options, Put Options, Subscription Option etc. in relation to any shares issued by the company, restriction of transfer of shares or granting securities interest over shares, provision for minority protection, lock-down or for the interest of the shareholders and the company. Provisions referred to above, which find place in a SHA, may regulate the rights between the parties which are purely contractual and those rights will have efficacy only in the course of ownership of shares by the parties.”

Validity of Restrictive Covenants under Companies Act, 1956

The Supreme Court has held that they are valid against a company only if they are a part of the Articles of Association or else they remain a private contract between shareholders – V.B. Rangarajan vs.  V. Gopalkrishnan, 73 Comp. Cases 201 (SC). While thishas been the cornerstone for the law on Shareholders’ Agreements, the Supreme Court in Vodafone (supra) has taken a contrary view. The Concurring Order of J. Radhakrishnan, states in relation to Rangarajan’s judgment as follows:

“This Court has taken the view that provisions of the Shareholders’ Agreement imposing restrictions even when consistent with Company legislation, are to be authorized only when they are incorporated in the Articles of Association, a view we do not subscribe.”

Rangarajan’s decision was delivered by a Two-Member Supreme Court Bench, while Vodafone’s decision has been delivered by a Three-Member Bench, although the disagreement is expressed by the Concurring Judgment of one of its Members. It may be noted that the Vodafone decision has not expressly overruled Rangarajan’s decision.

Vodafone’s decision has further laid down that shareholders can enter into any Agreement in the best interest of the company, but the only thing is that the provisions shall not go contrary to the Articles of Association. The essential purpose of the Agreement is to make provisions for proper and effective internal management of the company. It can visualise the best interest of the company on diverse issues and can also find different ways not only for the best interest of the shareholders, but also for the company as a whole.

In the case of M.S. Madhusoodhanan vs. Kerala Kaumudi Pvt. Ltd., 117 Comp Cases 19 (SC) it was held that consensual agreements between shareholders relating to their shares do not impose restriction on transferability of shares and they can be enforced like any other agreement. Even if the company is a party to the Shareholders’ Agreement, the provisions relating to management of the affairs of a company cannot be given effect to unless the same are incorporated in its Articles of Association – IL &

FS Trust Co. Ltd vs. Birla Perucchini Ltd., 47 SCL 426 (Bom). Again, in Rolta India Ltd vs. Venire Industries Ltd., 100 Comp. Cases 19 (Bom), it was held that the shareholders cannot infringe upon the fiduciary rights and duties of directors. Any agreement by which the shareholders agreed not to increase the number of directors above a certain limit was not valid as long as the restriction was enshrined in the Articles of Association. The shareholders cannot dictate terms to directors except by amending the Articles. In Reliance Natural Resources Ltd. vs. Reliance Industries Ltd. [2010] 7 SCC 1, it was held that a Family Arrangement MOU executed by the key personnel of a listed company was held not to be binding on the company since the contents of the MOU were not made public. It was held that the MOU did not fall under the corporate domain – it was not approved by the shareholders. Therefore, technically, the MOU was not legally binding.

A Single Judge of the Bombay High Court, in the case of Western Maharashtra Development Corporation vs. Bajaj Auto Ltd., 154 Comp Cases 593 (Bom), had ruled that a Shareholders’ Agreement of a public company containing restrictive covenants was invalid since the Articles of a public company could not contain covenants restricting the trans-fer of shares and it was contrary to Section.108 of the Companies Act, 1956. Subsequently, a Division Bench of the Bombay High Court, in the case of Messer Holdings Ltd vs. Shyam Ruia, 159 Comp Cases 29 (Bom) has overruled this decision of the Single Judge of the Bombay High Court. The Bombay Court here was concerned with the validity of a Right of First Refusal Clause. The Court held that the intent of section 111A of the Companies Act, 1956 dealing with free transferability of shares does not in any manner hamper the right of its shareholders to enter into private treaties so long as it is in accordance with the Companies Act, 1956 and the company’s Articles of Association. Had the Companies Act, 1956 wanted to prevent such private contracts it would have expressly done so.

Interestingly, a recent decision of the Delhi Court in the case of World Phone India vs. WPI Group Inc, 119 SCL 196 (Del) has held that even a provision in the Shareholders’ Agreement which is not contrary to the Articles of Association or the Companies Act, 1956 cannot be enforced against the company if the company is not a party to such an Agreement. While it was settled law that in case of a conflict the Articles would prevail but this decision lays down that even if the Articles are silent on an issue and not in conflict, the provisions of the Shareholders’ Agreement cannot be enforced against the company.

Thus, the issue of Articles vs. Shareholders’ Agreement has yet not reached a finality.

Position under Companies Act, 2013

The Companies Act, 2013 now provides that securities in a public company are freely transferrable but a contract or an arrangement in respect of transfer of securities in a public company shall be enforceable as a contract. This express provision sets at rest once and for all whether public companies can contain pre-emptive rights. This is a big boost for Private Equity/FDI/Private Investment in Public Equity (PIPE) transactions since they almost always come with pre-emptive rights.

Position in the case of Listed Companies

It may be specifically noted that the Bombay High Court judgment in Messer Holdings (supra) was in the case of a listed company. Recently, the SEBI, taking a cue from the Companies Act, 2013, has issued a Notification under the Securities Contract (Regulation) Act, 1956, expressly permitting “contracts for pre-emption including right of first refusal, or tag-along or drag along rights contained in shareholders agreements or articles of association of companies”. Thus, these restrictive covenants can now expressly find their way even in Shareholders’ Agreements of Listed Companies, without the prior approval of the SEBI. It may be noted that even today the Articles of Association of several Listed Companies contain such pre-emptive rights.

The Notification further provides that even agreements for put and call options on listed securities are permitted subject to the following conditions:

(i)    the title and ownership of the underlying securities is held continuously by the seller for a minimum period of 1 year from the date of entering into the contract;

(ii)    the price or consideration payable for the sale or purchase of the underlying securities pursuant to exercise of any option contained therein, is in compliance with all the laws for the time being in force as applicable;

(iii)    the contract is settled by way of actual delivery of the underlying securities; and

(iv)    the contract shall be in accordance with the provisions of the Foreign Exchange Management Act, 1999 and Rules or Regulations made thereunder.

SEBI had in the cases of Cairn India Ltd., Vedanta Resources Plc. and Vulcan Rubber Ltd., held that an option arrangement in the case of shares of a listed company is not valid. This change in position is a welcome move.

Veto Rights/Affirmative Vote

Almost all investors want Veto Rights, i.e., certain specific fundamental issues, on which the company would not take a decision without the affirmative vote of the Investor. Thus, the Investor acquires a veto right on these issues. Some of the issues which may carry a veto include, alteration of the rights and privileges of the investor’s shares; change in the capital structure of the company; related party transactions with promoters in excess of certain limits; corporate reorganisation of the company; borrowing in excess of certain limits; change in the scope of the business; capital expenditure in excess of certain limit; commencement of any major litigation by the company; changes in key management personnel, etc.

By virtue of a veto, the investor has power to stall a decision of the company. However, in most cases, he does not have power to carry out a decision on his own behest. Thus, if he refuses the company cannot go ahead but if he proposes and the com-pany refuses then he cannot proceed on his own. A question often asked is that does the grant of such special rights make the investor a person in control of the company? This is a question of fact.

In the case of Subhkam Ventures (I) (P.) Ltd. vs. SEBI, 99 SCL 159 (SAT), the SAT held that the question to be asked in each case is whether the acquirer is the driving force behind the company and whether he is the one providing motion to the organization. If yes, he is in control but not otherwise. In short, control means effective control. In this case, the SAT held that the investor who had veto rights did not control the company. The SEBI contested it before the Supreme Court, where an interesting mutual consent agreement was arrived upon. The Supreme Court’s Order in SEBI vs. Subhkam Ventures, Civil Appeal No. 3371 /2010 states that certain facts changed after the SAT Order. Accordingly, the Court, by mutual consent, disposed of the appeal filed by SEBI by keeping the question of law open and it is also clarified that the order passed by the SAT will not be treated as a precedent. This leaves the all-important question yet open for interpretation. Some of the recent high-profile foreign takeovers/joint ventures have reportedly run into a roadblock with the SEBI on similar grounds. SEBI has questioned whether the grant of special investor protection rights to the foreign investor results into a sharing of management control with the Indian promoters?

Enforceability of Shareholders’ Agreement

A breach of a Shareholders’ Agreement would give rise to a suit for specific performance by the aggrieved party under the Specific Relief Act. However, in several cases, the Agreement itself provides that Arbitration would be the sole dispute resolution mechanism. It may further provide for Indian or Foreign Arbitration, e.g., in Singapore, London, Paris, etc.

In the case of Vodafone (supra), the Supreme Court held that the manner in which Shareholders’ Agreements are to be enforced in the case of breach is given in the general law between the company and the shareholders. A breach of such an Agreement which does not breach the Articles of Association is a valid corporate action but the aggrieved can get remedies under the general law of the land for breach of the Agreement and not under the Companies Act.

In the case of Chatterjee Petrochem (I) P Ltd vs. Haldia Petrochemicals Ltd., 110 SCL 107 (SC), an interesting issue arose. Certain disputes arose be-tween two sets of shareholders who were party to a Shareholders Agreement. The aggrieved party moved a petition for oppression u/s. 397 of the Companies Act, 1956. The Supreme Court held that in that case the breach of the Shareholders’ Agreement was a breach between two members of the company and not by the company itself. Hence, no occasion arises for filing a plea for oppression u/s. 397.

Conclusion

Shareholder Agreements have always attracted a lot of controversy and the spate of conflicting judgments have fueled the fire further. Parties to a Shareholders’ Agreement would be well advised to understand the implications of what they are getting into before signing such Agreements. Do Not Act in Haste and Repent in Leisure!!

(i) Chapter VII – Section 88 to 122 – Management and Administration.
(ii) Chapter VIII – Section 123 to 127 – Declaration of Dividend
(iii) Chapter VI – Section 77 to 87 – Registration of charges.

Most of these provisions are similar to the provisions in the existing Act. Some of the important provisions which require attention during the course of management, administration and Declaration of Dividends by Companies are discussed in this Article.

1 Register of Members:

1.1  The provisions relating to maintenance of Register of Members. Debenture holders and any other securities in the company in section 88 of the New Act are similar to the provisions in sections 150 to 152 and 152A of the existing Act. Draft Rules 7.1 to 7.6 provide for the procedure and also prescribes Form in which the Register is to be maintained.

1.2  Sections 89 and 90 of the New Act which correspond to existing section 187C and 187D provide for declaration to be made by a person who does not hold beneficial interest in the shares registered in the company in his name. Similarly, the beneficial owner has also to make this declaration. This declaration is to be made in the prescribed form and submitted to the company within the prescribed time limit. Particulars of changes in beneficial interest are also to be filed with the company within 30 days of change. The company has to register particulars of such beneficial interest and file a return in the prescribed form with the ROC within 30 days of receipt of such declaration. Draft Rule 7.7 prescribes Forms for this purpose and also provides for procedure for this purpose.

1.3  The Central Government is given power to investigate about the beneficial ownership of shares in the company by appointing one or more competent persons under new section 90.

1.4  The above Register of members, debentureholders etc. can be closed for an aggregate period of 45 days in each year, but not exceeding 35 days at a time, u/s. 91 which corresponds to existing section 154. If the above Register is closed for more than the above period, the company and every defaulting officer will be liable to pay penalty of Rs. 5,000/- per day of default subject to maximum of Rs.1 lakh. It may be noted that Section 91 has come into force from 12-09-2013. Draft Rule 7.8 provides for procedure for this purpose.

1.5  If the company fails to maintain the register u/s. 88, the company and every defaulting officer shall be punishable with minimum fine of Rs. 50,000/- which may extend to Rs. 3 lakh. In the case of continuing default fine upto Rs. 10,00/- per day can also be charged.

1.6  If a person required to make declaration of beneficial interest u/s. 89, without reasonable cause, fails to make the declaration, he will be punished with fine upto Rs. 50,000/- . In case of continuing default fine upto Rs. 1,000/- per day can also be charged. Similarly, if the company makes default in filing return giving particulars of these declarations with ROC as required u/s. 89(6), it shall be liable to pay minimum fine of Rs. 500/- which may extend to Rs. 1,000/-. In the case of continuing default, further fine upto Rs. 1,000/- per day for the period of delay can be levied.

2. Annual return:

2.1 New Section 92 which corresponds to existing sections 159, 161 and 162 provides for filing the Annual Return with ROC within 60 days of holding Annual General Meeting. If such AGM is not held the Annual Return should be filed with ROC within 60 days of the last date when AGM was due to be held. In such a case the company will have to file a statement specifying reasons for not holding the AGM in time.

2.2 Broadly stated the Annual Return is to be prepared in the prescribed form containing the following particulars as on the last day of the financial year.

(i) Its Registered Office, principal place of business, particulars of its holding, subsidiary and associate companies.

(ii) Its shares, debentures and other securities and shareholding pattern.

(iii) Its indebtedness.

(iv) Its members and debenture-holders along with changes therein since the close of previous financial year

(v) Its promoters, directors, key managerial personnel (KMP) along with the charges therein since the close of the previous financial year.

(vi) Meetings of Members or a class thereof, Board and its various committees with attendance details.

(vii) Remuneration of Directors and KMP.

(viii) Penalty and punishment imposed on the company, its directors or officers with details of compounding of offenses and appeals made against such penalty or punishment.

(ix) Matters relating to certification of compliances, disclosures as may be prescribed.

(x) Details in respect of Shares held by FIIs giving their names, addresses etc. and percentage of shareholding as may be prescribed.

(xi) Such other matters as may be prescribed.

The annual return is to be signed by a Director and company secretary/company secretary in practice. In the case of one person company and small company, it is to be signed by the company secretary or, if there no secretary, by the director.

In the case of a listed company or such specified companies, as may be prescribed, the Annual Return is required to be certified by a company secretary in practice in the prescribed form.

2.3 An extract of the Annual Return in the prescribed form should form part of the Board Report.

Draft Rules 7.9, 7.10, and 7.12 provide for Forms of Annual Return etc and procedure to be followed for filing the Annual Return with ROC.

2.4  If the company does not file the Annual Return within 60 days as stated above or within the extended time as provided in section 403 with additional fees, the company shall be punishable with the minimum fine of Rs. 50,000/- which may extend to Rs. 5 lakh. Similarly, every defaulting officer will be punishable with imprisonment upto 6 months or with a minimum fine of Rs. 50,000/- which may extend to Rs. 5 lakh or with both. Similar fine can be levied on the company secretary in practice if his certificate is not in conformity with the requirements of the section.

2.5  Section 93 is a new section which provides that every listed company should file a return in the prescribed form with ROC with respect to changes in the number of shares held by promotors and top 10 shareholders within 15 days of such charge. Draft Rule 7.11 prescribes Form No.7.10 for this purpose.

2.6  New sections 94 and 95 which correspond to existing sections 163 and 164 provide for place at which Registers, Returns and other documents required to be maintained by the company shall be kept. These registers, documents etc.will be open for inspection by shareholders, debenture holders etc. Draft Rules 7.13 and 7.14 provide for detailed procedure for this purpose. It is provided that the copies of Annual Returns should be preserved for 8 years and Register of Debenture Holders, Foreign register of Members etc. should be preserved for 15 years.

3. Procedure for General Meetings:

3.1 New sections 96 to 122 deal with procedure to be followed for holding Annual General Meeting, Extra ordinary general meeting and other related matters. These sections are similar to the existing sections 166 to 197. The provisions made in the new sections being similar to existing provisions, some of the important provisions are stated in the following paragraphs.

3.2    Annual General Meeting (Section 96)

(i)    One person company is not required to hold AGM.

(ii)    All other companies have to hold AGM once every year within the same time limit as provided in existing sections 166 and 210. The only difference is that the first AGM which at present can be held within 18 months of date of incorporation will now required to be held within 9 months of the closing of the first financial year.

(iii)    Under existing section 166 AGM can not be held on a ‘Public Holiday’. Now u/s. 96 AGM can be held on a “Public Holiday”. However, it cannot be held on a “National Holiday” as may be declared by the Central Government.

Further, under the new provision it is specifically provided that AGM can be held during business hours i.e. between 9.00 AM and 6.00 PM. The Central Government can grant exemption from this requirement, subject to such conditions which it may impose.

(iv)    If there is a default in holding ay AGM, the Tribunal can, on an application by any member, direct the company to hold such a meeting subject to such conditions as the Tribunal may specify under new section 97.

(v)    Similarly, the Tribunal, on its own or on an application by a Director or member, direct the company to hold any general meeting (other than AGM) subject to such conditions which it may specify under new section 98.

(vi)    If there is default in holding any general meeting, in accordance with the above direction of the Tribunal the company and every defaulting officer of the company will be punishable with fine upto Rs1 lac. In case of continuing default a further fine upto Rs.5000/- per day during which default continues can be levied under new section 99.

3.3    Extraordinary General Meetings:

The procedure for calling an Extraordinary General Meeting in new section 100 is the same as in the existing section 169. This procedure is laid down in Draft Rule 7.15. This section has come into force from 12-09-2013.

3.4    Notices for General Meetings:

(i)    New section 101 provides for notice to be given in writing or through electronic mode 21 clear days before the meeting in the same manner as provided in existing sections 171 and 172. However, a general meeting can be called by giving shorter notice if consent is given by at least 95% of members entitled to vote at such meeting.

(ii)    Explanatory statement is to be annexed with every notice concerning each item of special business to be transacted at the General Meeting. New section 102 which corresponds to existing section 173 provides for this requirement. It explains the material facts in respect of which the explanation as under is to be provided:

(a)    Nature of concern or interest, financial or otherwise in respect of each items of every director, manager, KMP, and their relatives.

(b)    Any other information and facts that may enable members to understand the meaning, scope and implications of the items of business and to take decision thereon.

(iii)    It is further provided in section 102 that if any item of specified business relates or affects any other company, the notice must disclose the extent of interest of every promoter, director, Manager or KMP of the company, if it is more than 2% of the paid up share capital of that company. This section has come into force on 12-09-2013.

(iv)    Where, as a result of the non-disclosure or insufficient disclosure in the statement to be furnished as above by the promoter, director, manager or KMP, any benefit accrues to any of these persons, he shall hold the same in trust for the company and compensate the company to the extent of the benefit received by him.

(v)    In the event of any contravention of this section, the defaulting promoter, director, manager, KMP or relatives of any of them shall be punishable with fine upto Rs.50000/-or 5 times the amount of the benefit received by such person, whichever is more.

(vi)    The procedure for giving Notice of the General Meeting is given in Draft Rule 7.16.

3.5    Quorum for the General Meeting:

Under the existing section 174 quorum required for the General Meeting of members of public companies is 5 members personally present at the meeting, unless the articles stipulate a larger number. New section 103 provides for a quorum based on number of members of the company as under, unless the articles provide for larger numbers.

(i)    5 Members personally present if the number of members on the date of meeting is less than 1,000.

(ii)    15 Members, if the number of members is between 1,000 and 5,000.

(iii)    30 Members, if the number of Members are more than 5,000.

For private companies, the quorum of 2 members continue, as at present. Section 103 has come into force on 12-09-2013.

3.6    Procedure for conducting General Meeting:

(i)    New sections 104 to 116, deal with the procedure for election of chairman, proxies, voting at general meeting etc. These provisions are similar to existing provision in sections 175 to 185 and 187 to 192A. Only section 108 is new. It provides that the Central Government may prescribe class of companies in which members will be allowed to exercise their voting rights by electronic means. It may be noted that Sections 104 to 107, 111 to 114 and 116 have come into force from 12-09-2013.

(ii)    At present, section 190 does not provide for any requirement that members who give special notice should hold some minimum voting power in the company. New section 115, now provides that such special notice for consideration of a resolution as required under the Act or Articles can be given by such number of members holding not less than one percentage of total voting power or holding shares on which such aggregate sum not exceeding Rs. 5 lakh, as may be prescribed, has been paid up. (Refer Draft Rule 7.21).

(iii)    It may be noted that new section 110 provides for passing resolutions by “Postal Ballot”. This provision is similar to existing section 192A. The company can use this procedure in respect of such items of business as the Central Government may by notification provide. (Refer Draft Rule 7.20 (16).

(iv)    Form of Proxy to be given u/s. 105 (Form No.7.11) is prescribed under Draft Rule 7.17. Procedure for voting through electronic means is given in Draft Rule 7.18. Similarly procedure for Poll process is provided in Draft Rule 7.18 and procedure for Postal Ballot is provided in Draft Rule 7.20.

3.7    Resolutions and Agreements to be filed with ROC:

New section 117, which corresponds to existing section 192, provides for filing of Resolutions and Agreements specified in section 117(3) with ROC within 30 days. In the event of contravention of the provision of this section the company shall be punishable with minimum fine of Rs. 5 lakh which may extend to Rs. 25 lakh. Similarly, every defaulting officer shall be punishable with minimum fine of Rs. 1 lakh which may extend to Rs. 5 lakh. Form No. 7.14 is prescribed by Draft Rule 7.22.

3.8    Minutes of Meetings:

(i)    New section 118 corresponds to existing sections 193 to 195 and 197. It provides for maintenance of minutes of proceedings of General Meetings, Board meetings and other meetings. It is specifically provided in this new section that while recording these minutes, the company shall observe the “Secretarial Standards” in this respect, issued ICSI as approved by the Central Government.

(ii)    In the event of non-compliance with the requirement of this section, the company will be liable to penalty of Rs. 25,000/- and every defaulting officer shall be liable to pay penalty of Rs. 5,000/-. If any person is found guilty of tempering with the minutes, he shall be punishable with imprisonment upto 2 years and with minimum fine of Rs. 25,000/- which may extend to Rs. 1 lakh.

(iii)    New section 119 which corresponds existing to section 196 provides for inspection of the minute books of general meetings of the company. If such inspection is refused, monetary penalty similar to the one stated in (ii) above can be levied on the company and the defaulting officer.

(iv)    Detailed procedure for this purpose is provided in Draft Rules 7.23 and 7.24.

3.9    Some New Provisions:

Sections 120 to 122 are new. They provide as under.

(i)    Maintenance and Inspection of Document in Electronic Form Section 120 provides that any document, record, register, minutes etc. which are required to be kept by a company and allowed to be inspected or copied by any person can be kept, inspected or copies given in electronic form in the prescribed manner. This is prescribed in Draft Rule 7.25.

(ii)    Report on AGM

Under Section 121 a listed company is required to prepare in the prescribed manner a report on each AGM stating that such meeting was convened, held and conducted as required under the companies Act. This report is to be filed with ROC within 30 days of conclusion of AGM. Draft Rule 7.26 gives the contents of this Report. In the event of contravention of this provision, the company will be punishable with minimum fine of Rs. 1 lakh which may extend to Rs. 5 lakh. Similarly, every defaulting officer will be punishable with minimum fine of Rs. 25,000/- which may extend to Rs. 1 lakh.

(iii)    One person company

Section 122 provides that sections 98 and 100 to 111 shall not apply to one person company (OPC) . If a company is required to transact any business by ordinary or special resolution u/s. 114, it shall be sufficient in the case of OPC if the said resolution is recorded in the minute book which shall be signed by the Director.

4.  Registration of Charges:

4.1 New Sections 77 to 87 deal with the procedure relating to Registration of charges. These provisions are similar to provisions of sections 125 to 127, 130, 134, 135, 137, 138 and 141 to 143 of the existing Act. For this purpose, section 2(16) defines the word ‘charge’ to mean “An interest or lien created on the property or assets of a company or any of its undertakings or both as Security and includes a Mortgage. Section 2(16) has come into force from 12- 09-2013. Broadly stated, the new provisions are as under.

(i)    U/s. 77 every charge on the property or as-sets (whether tangible or intangible) created by a company (whether public or private) shall be registered with ROC within 30 days of creation of such charge. For this purpose, the prescribed form will have to be filed with the fees. In the event of any delay, ROC can permit the registration of such charge within 300 days on payment of additional fees.

(ii)    The existing section 125(4) requires a company to register only 9 type of charges. Under the new provision every charge created by it on property, assets or undertaking is to be registered u/s. 77.

(ii)    ROC has to give a Certificate of such registration in the prescribed form.

(iv)    If the company fails to register a charge, the person in whose favour charge is created can apply to ROC in the prescribed manner, as provided in section 78.

(v)    ROC has to keep a Register of charges in the prescribed form. This Register will be open to inspection to any person on payment of fees.

(vi)    Any modification of charge is also required to be registered with ROC.

(vii)    On satisfaction of any charge, it is also to be registered with ROC within 30 days. In the event of delay, ROC can permit such registration within 300 days on payment of additional fees.

(viii)    The company has also to maintain a Register of charges in the prescribed manner. This register shall be open to inspection by any member or creditor or by any other person subject to such reasonable restrictions as the company may by its AOA, impose.

(ix)    If the company does not register such creation, modification or satisfaction of charge the company or any other person can apply to the Central Government u/s. 87. The Government can order such registration of charge or its modification, satisfaction etc. on such terms and conditions as it may consider appropriate.

(x)    Draft Rules 6.1 to 6.10 prescribes Forms to be filed with ROC and other procedure to be followed and documents to be maintained for this purpose.

4.2    A new provision is made in section 83. It authorizes the ROC to make entries in the Register of charges if any evidence is produced before him about creation of a charge or modification/satisfaction of charge on any property/assets by a company. ROC has to intimate the concerned parties about making such entry within 30 days.

4.3 If there is any contravention of the provisions, section 86 provides for the following penalties.

(i)    The company shall be punishable with a minimum fine of Rs. 1 lakh which may extend to Rs. 10 lakh.

(ii)    Every defaulting officer shall be punishable with imprisonment upto 6 months or with minimum fine of Rs. 25,000/- which may extend to Rs. 1 lakh or with both.

The above penalty can be levied even if the company has complied with the above provisions but filed the particulars of charges, modification or satisfaction etc. of the charges within the extended time as stated above. This section has come into force on 12-09-2013.

5.    Declaration and Payment of Dividend:

5.1 New Sections 123 to 127 provide for declaration and payment of Dividends by a Company. These Sections are similar to existing sections 205 to 207. Broadly stated these provisions are as under:-

(i)    The dividend can be declared and paid only out of the following profits;

(a)    Profits of the financial year, after providing depreciation as stated in Section 123(2) read with Schedule II.

(b)    Accumulated profits of the earlier years, after providing for depreciation u/s 123(2) read with Schedule II.

(c)    Out of money provided by Central or State Government for payment of dividend in pursuance of a guarantee given by the Government.

(ii)    Existing section 205(2A) provides that a dividend can be declared for any financial year only after transferring such percentage of profit not exceeding 10%, as may be prescribed. In the new section 123, it is provided that such dividend may be declared or paid after transferring such percentage of its profits for the financial year to reserves as the Company may consider appropriate. Thus a Company can declare or pay dividend in any year even without making such transfer to reserves.

(iii)    In the event of inadequacy or absence of profits in any financial year, the company can declare dividend out of its “Free Reserves” in accordance with the prescribed Rules.(Refer Draft Rule 8.1)

(iv)    Board of Directors can declare “Interim Dividend” out of surplus available in the Profit & Loss Account and out of profits of the Financial Year upto the date of declaration of such dividend. If the Company has made a loss upto the end of the quarter, preceding the date of declaration of interim dividend, the Board cannot declare interim dividend at a rate higher than the average dividend declared by the Company during the preceding 3 Financial Years.

(v)    The amount of dividend, including interim dividend, has to be deposited in a Separate Scheduled Bank Account within 5 days from the date of declaration.

(vi)    It will be possible for the Company to utilise the profits and reserves for issue of Bonus
Shares or for payment of Unpaid amount on partly paid shares.

(vii)    It may be noted that a Company cannot declare or pay dividend if it has made de-fault in repayment of Deposits or Interest as provided in sections 73 and 74 till such time when the default continues.

(viii)    Draft Rules 8.1 and 8.2 provides for certain conditions to be complied with before declaring dividend.

5.2  Unclaimed Dividend Account:

(i)    If any dividend is not claimed or paid within 30 days from the date of declaration, it has to be transferred, within 7 days, to a “Unpaid Dividend Account” to be opened in a Scheduled Bank.

(ii)    If any amount of unpaid dividend is not claimed or paid within 90 days, the company has to put the list of such unpaid dividend on the website of the company or other approved website in the prescribed manner. Draft Rule 8.3 provides for procedure for this purpose.

(iii)    In the event of delay in transferring the amount to such special account, the company will have to pay 12% P.A. interest on the unclaimed dividend amount.

(iv)    If the unclaimed dividend is not claimed by any shareholder for 7 years, the company will have to transfer the said amount to “Investor Education and Protection Fund” as provided in section 125. Procedure for this is provided in Draft Rule 8.4.

(v)    Section 124(6) makes a departure from the existing provisions of section 205C and provides that even the shares on which dividend is not claimed for 7 years will have to be transferred to the above Fund. For this purpose, a statement in the prescribed form is to be filed with the Administrator of the Fund. The shareholder whose shares are so transferred to the above Fund will have to make a claim for return of such shares with the Administrator of the Fund in the prescribed manner. Draft Rule 8.5 gives detailed procedure for this purpose.

5.3    Investor Education and Protection Fund:

New Section 125, corresponding to existing section 205C provides for establishment of Investor Education and Protection Fund. Central Government is authorised to establish this Fund and prescribe Rules for its administration as provided in section 125. Besides the unclaimed Dividend outstanding for 7 years and shares relating to such dividend, the company has also to transfer the following amounts which have remained unclaimed for 7 years.

(a)    Application Money received by the Company for allotment of shares or securities and due for refund.

(b)    Matured Deposits due with Interest.

(c)    Matured Debentures due with interest.

(d)    Sale proceeds of Fractional Shares arising out of issue of Bonus Shares, Merger and Amalgamation.

(e)    Redemption amount of Preference Shares remaining unpaid or unclaimed.

Detailed provisions are made in section 125 for administration of “Investment Education and Protection Fund”, investment of funds, return of the funds to claimants and utilisation of surplus funds. Central Government has to prescribe Rules for this purpose. It is also provided that the existing balance in Investor Education and Protection fund created u/s. 205C of the existing Act shall also be transferred to the new fund to be established under new section 125. Further, amounts transferred to the existing fund u/s. 205C (2) (a) to (d) of the existing Act can be refunded to the concerned person according to the Rules to be prescribed under new section 125. Detailed provision is given in Draft Rules 8.6 and 8.7.

5.4    Penalties for Defaults:

(i)    If a Company contravenes provisions relating to unclaimed Dividends as stated in section 124, it will be punishable with a minimum fine of Rs. 5 lakh which may extend to Rs. 25 lakh. Similarly every defaulting officer will be punishable with a minimum fine of Rs. 1 lakh which may extend to Rs. 5 lakh.

(ii)    If a Company has declared dividend but the same has not been paid or the warrant for the dividend has not been posted within 30 days from the date of declaration, the following penalties can be levied.

(a)    Every director who is knowingly a party to the default will be punishable with imprisonment upto 2 years and with minimum fine of Rs. 1, 000/- per day during which such default continues.

(b)    The Company will have to pay interest @ 18% p.a. on the dividend amount for the period of delay.

Proviso to section 127 states that under cer-tain circumstances the above penalty under (ii)will not be leviable.

(iii)    It may be noted that the above minimum fine is leviable at fixed amount without reference to the amount of dividend in respect of which the default has occurred. To the extent the above penalty provisions are harsh.

(iv)    Section 127 has come into force from 12-09-2013.

6.    To Sum Up

6.1. The above provisions for Management and Administration of companies in the New Act are more or less on the same lines as the existing provisions of the Companies Act, 1956. These provisions are mostly procedural. The company management will have to comply with the new procedure in the day to day working. Some of the procedures have been streamlined in order to improve Corporate Governance and also to safeguard the interest of the stakeholders.

6.2 The provisions relating to declaration and payment of dividend have also been streamlined under the new Act. In order to protect the interest Fixed Depositors it is now provided that no dividend on equity shares can be declared during the period when default relating to repayment of Fixed Deposit or Interest due continues. However, the minimum fine to be levied for default relating to payment of dividend is fixed without reference to the amount of dividend involved. To this extent the provision is also harsh.

6.3 Taking an overall view of the provisions relating to management and administration of companies under the new Act, including provisions relating to declaration and payment of dividends, acceptance of public deposits and registration of charges it can be stated that these will streamline and simplify the day to day procedural requirements. The officers in charge of the management and administration of companies will have to be vigilant in complying with the new provisions to avoid any defaults. If the new provisions are complied with in the spirit in which they are enacted, the quality of Corporate Governance will improve to a great extent in the coming years.