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Independent Directors- Big role to play

INDEPENDENT DIRECTORS- BIG ROLE TO PLAY

“BETTER LATE THAN NEVER”

The Companies Act, 2013 provides provisions regarding Independent Directors, earlier the 1956 Act does not provide the same.

Let’s start from scratch for better understanding: Who are they, Laws governing them, Position hold, Strength, Qualification, Appointment procedure, Pecuniary benefits, Tenure, Resignation or removal, Data bank, Liability and Special code under Companies Act, 2013

WHO ARE INDEPENDENT DIRECTORS?

The Independent Directors are the persons who are not in the whole time employment of the Company but participates in the affairs of the Company and are entitled to attend the Board meetings, General Meetings and share their knowledge in the respective areas of their expertise with the stakeholders. They are entitled to evaluate the performance of non-independent directors on the board of the Company. They are not just legal formalities but they are responsible for better compliance.

I tried to gather various compliances required to be followed in spirit and true manner:

LAWS GOVERNING INDEPENDENT DIRECTORS IN INDIA:

  1. Companies Act, 2013- For Class of Companies (stated below)
  2. Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015- For Listed Companies only

UNDER COMPANIES ACT, 2013:

DEFINITION:

As per Section 2(47), “independent director” means an independent director referred to in sub-section (5) of section 149. (It may be an error as Section 149(5) provides something else)

When we go to Section 149(6), it provides as follow:

An independent director in relation to a company, means a director who is not a managing director or a whole-time director or a nominee director, —

  • who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;

[In case of Government Companies, for the words “Board’, the words “Ministry or Department of the Central Government which is administratively in charge of the Company, or as the case may be, the State Government” shall be substituted.]

(b) (i) who is or was not a promoter of the company or its holding, subsidiary or associate company;

(ii) who is not related to promoters or directors in the company, its holding, subsidiary or associate company;

(c) who has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year;

[In case of Government Companies, section 149(6)(c ) shall not apply vide MCA notification No. GSR 463E, dated 05.06.2015]

(d) none of whose relatives has or had pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or their promoters, or directors, amounting to 2 per cent or more of its gross turnover or total income or 50 lakh rupees or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year;

(e) who, neither himself nor any of his relatives—

(i) holds or has held the position of a key managerial personnel or is or has been employee of the company or its holding, subsidiary or associate company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed;

(ii) is or has been an employee or proprietor or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of—

(A) a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or

(B) any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to ten per cent or more of the gross turnover of such firm;

(iii) holds together with his relatives two per cent or more of the total voting power of the company; or

(iv) is a Chief Executive or director, by whatever name called, of any non-profit organisation that receives twenty-five per cent or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds two per cent or more of the total voting power of the company; or

(f) who possesses such other qualifications as may be prescribed.

“From above, it is also cleared that the Independent Directors should not have any kind of pecuniary relationship with the Company, nor he relates to any of the promoter or any other Director.”

POSITION OF INDEPENDENT DIRECTORS:

  1. MEMBERSHIP IN DIFFERENT COMMITTEES:

Independent Directors have a role at Corporate Social Responsibility Committee. The Committee should have at least one Independent Director out of 3 or more directors. Such provisions help in transparency & credibility.

The Audit Committee, Nomination and Remuneration Committee shall consist of Independent Directors as a Majority.

  1. ROTATION NOT APPLICABLE:

The Provisions relating to Rotation of Directors shall not be applicable to Independent Directors.

  1. SEPARATE MEETING OF INDEPENDENT DIRECTORS AND BOARD EVALUATION OF INDEPENDENT DIRECTORS:

The Independent Directors shall hold at least 1 meeting in a year without the Non Independent Directors & Members of Management. Performance evaluation of Independent Directors to be done by the entire Board, excluding the director being evaluated.

  1. DECLARATION OF INDEPENDENCE:

Every independent director shall at the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in the circumstances which may affect his status as an independent director, give a declaration that he meets the criteria of independence as provided in sub-section (6).

  1. ABIDE BY THE CODE:

Every Independent Director shall abide by the provisions specified in Schedule IV of the Companies Act, 2013.

  1. CONSENT FOR MEETING AT SHORTER NOTICE:

A meeting of the Board may be called at shorter notice to transact urgent business subject to the condition that at least one independent director, if any, shall be present at the meeting.

In case of absence of independent directors from such a meeting of the Board, decisions taken at such a meeting shall be circulated to all the directors and shall be final only on ratification thereof by at least one independent director, if any.

MANDATORY APPOINTMENT OF INDEPENDENT DIRECTOR:

Section 149(4) requires every listed company to appoint minimum one-third of the total number of directors as independent directors.

For public companies, other than the listed companies, Rule 4 of The Companies (Appointment and Qualification of Directors) Rules, 2014 provides that following class of public companies shall have at least two persons as independent directors: –

  1. a) Public Companies having paid up share capital of Rs.10 Crores or more
  2. b) Public Companies having turnover of Rs.100 Crore or more
  3. c) Public Companies having outstanding loan, debentures and deposits, in aggregate, in excess of Rs.50 Crore.

In view of above, it is pertinent to note that the Private Companies irrespective of their paid up share capital or turnover or borrowings are not required to appoint the Independent Directors. But Companies (say Big private companies and other public companies) may appoint Independent Directors at their will for good corporate governance practices.

QUALIFICATIONS OF INDEPENDENT DIRECTOR:

An independent director shall possess appropriate skills, experience and knowledge in one or more fields of finance, law, management, sales, marketing, administration, research, corporate governance, technical operations or other disciplines related to the company’s business.

PROCEDURE FOR APPOINTMENT OF INDEPENDENT DIRECTOR:

The appointment of independent director shall first be considered in the meeting of the Board of Directors subject to the fulfillment of all conditions specified in Schedule IV of the Companies Act, 2013 and subject to the approval of members of the company by way of ordinary resolution in general meeting as per Section 152(2).

PAYMENT OF SITTING FEE/COMMISSION:

According to Section 149(9), the independent director is entitled to receive (a) sitting fee for Board/Committee meetings as may be prescribed under second proviso under Section 197(5)

(b) reimbursement of expenses for attending the board/committee meetings

(c) commission related to profits of the company subject to the provisions of Section 197 and 198 (1 percent of the net profits if there is a Managing Director or Whole-Time Director or Manager and three percent of the net profits in any other case). The net profits shall be computed in accordance with Section 198. The independent director, however, shall not be entitled to receive any “stock option”.

RESIGNATION/REMOVAL:

The Independent Director who resigns or is removed shall be replaced by a new Independent director within period of 180 days.

TENURE OF OFFICE:

Independent Director once appointed shall hold office for a term of 5 consecutive years, but shall be eligible for reappointment. The Reappointment shall be on the basis of evaluation of Performance of the director:

  • A term up to 5 consecutive years
  • Eligible for reappointment for another term on passing of a special resolution by the Company and disclosure of such appointment in the Board’s Report
  • Not to hold office for more than 2 consecutive terms
  • However, eligible for appointment after the expiration of 3 years cooling period (Not to be associated with the Company in any capacity, either directly or indirectly during these 3 years)
  • Any tenure of an Independent Director on the date of commencement of this Act shall not be counted as a term.

DATA BANK:

Section 150 envisages that an independent director may be selected from a data bank containing names, addresses and qualifications of persons who are eligible and willing to act as independent directors, maintained by anybody, institute or association, as may be notified by the Central Government, having expertise in creation and maintenance of such data bank and put on their website for the use by the company making the appointment of such directors.

Provided that responsibility of exercising due diligence before selecting a person from the data bank referred to above, as an independent director shall lie with the company making such appointment.

LIABILITY:

The Companies Act, 2013, balances the wide nature of the obligations, functions and accountabilities imposed on an Independent Director. The Act limits the liability of Independent Directors to the matters which are directly relatable to them. Section 149 (12) limits the liability of an Independent Director and provides that he shall be held liable, only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently.

SPECIAL CODE FOR INDEPENDENT DIRECTORS:

The Code is a guide to professional conduct for independent directors. Adherence to these standards by independent directors and fulfilment of their responsibilities in a professional and faithful manner will promote confidence of the investment community, particularly minority shareholders, regulators and companies in the institution of independent directors.

  1. Guidelines of professional conduct:

An independent director shall:

(1) uphold ethical standards of integrity and probity;

(2) act objectively and constructively while exercising his duties;

(3) exercise his responsibilities in a bona fide manner in the interest of the company;

(4) devote sufficient time and attention to his professional obligations for informed and balanced decision making;

(5) not allow any extraneous considerations that will vitiate his exercise of objective independent judgment in the paramount interest of the company as a whole, while concurring in or dissenting from the collective judgment of the Board in its decision making;

(6) not abuse his position to the detriment of the company or its shareholders or for the purpose of gaining direct or indirect personal advantage or advantage for any associated person;

(7) refrain from any action that would lead to loss of his independence;

(8) where circumstances arise which make an independent director lose his independence, the independent director must immediately inform the Board accordingly;

(9) assist the company in implementing the best corporate governance practices.

  1. Role and functions:

The independent directors shall:

(1) help in bringing an independent judgment to bear on the Board’s deliberations especially on issues of strategy, performance, risk management, resources, key appointments and standards of conduct;

(2) bring an objective view in the evaluation of the performance of board and management;

(3) scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance;

(4) satisfy themselves on the integrity of financial information and that financial controls and the systems of risk management are robust and defensible;

(5) safeguard the interests of all stakeholders, particularly the minority shareholders;

(6) balance the conflicting interest of the stakeholders;

(7) determine appropriate levels of remuneration of executive directors, key managerial personnel and senior management and have a prime role in appointing and where necessary recommend removal of executive directors, key managerial personnel and senior management;

(8) moderate and arbitrate in the interest of the company as a whole, in situations of conflict between management and shareholder’s interest.

III. Duties:

The independent directors shall—

(1) undertake appropriate induction and regularly update and refresh their skills, knowledge and familiarity with the company;

(2) seek appropriate clarification or amplification of information and, where necessary, take and follow appropriate professional advice and opinion of outside experts at the expense of the company;

(3) strive to attend all meetings of the Board of Directors and of the Board committees of which he is a member;

(4) participate constructively and actively in the committees of the Board in which they are chairpersons or members;

(5) strive to attend the general meetings of the company;

(6) where they have concerns about the running of the company or a proposed action, ensure that these are addressed by the Board and, to the extent that they are not resolved, insist that their concerns are recorded in the minutes of the Board meeting;

(7) keep themselves well informed about the company and the external environment in which it operates;

(8) not to unfairly obstruct the functioning of an otherwise proper Board or committee of the Board;

(9) pay sufficient attention and ensure that adequate deliberations are held before approving related party transactions and assure themselves that the same are in the interest of the company;

(10) ascertain and ensure that the company has an adequate and functional vigil mechanism and to ensure that the interests of a person who uses such mechanism are not prejudicially affected on account of such use;

(11) report concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy;

(12) acting within his authority, assist in protecting the legitimate interests of the company, shareholders and its employees;

(13) not disclose confidential information, including commercial secrets, technologies, advertising and sales promotion plans, unpublished price sensitive information, unless such disclosure is expressly approved by the Board or required by law.

  1. Manner of appointment:

(1) Appointment process of independent directors shall be independent of the company management; while selecting independent directors the Board shall ensure that there is appropriate balance of skills, experience and knowledge in the Board so as to enable the Board to discharge its functions and duties effectively.

(2) The appointment of independent director(s) of the company shall be approved at the meeting of the shareholders.

(3) The explanatory statement attached to the notice of the meeting for approving the appointment of independent director shall include a statement that in the opinion of the Board, the independent director proposed to be appointed fulfils the conditions specified in the Act and the rules made thereunder and that the proposed director is independent of the management.

(4) The appointment of independent directors shall be formalised through a letter of appointment, which shall set out:

(a) the term of appointment;

(b) the expectation of the Board from the appointed director; the Board-level committee(s) in which the director is expected to serve and its tasks;

(c) the fiduciary duties that come with such an appointment along with accompanying liabilities;

(d) provision for Directors and Officers (D and O) insurance, if any;

(e) the Code of Business Ethics that the company expects its directors and employees to follow;

(f) the list of actions that a director should not do while functioning as such in the company; and

(g) the remuneration, mentioning periodic fees, reimbursement of expenses for participation in the Boards and other meetings and profit related commission, if any.

(5) The terms and conditions of appointment of independent directors shall be open for inspection at the registered office of the company by any member during normal business hours.

(6) The terms and conditions of appointment of independent directors shall also be posted on the company’s website.

  1. Re-appointment:

The re-appointment of independent director shall be on the basis of report of performance evaluation.

  1. Resignation or removal:

(1) The resignation or removal of an independent director shall be in the same manner as is provided in sections 168 and 169 of the Act.

(2) An independent director who resigns or is removed from the Board of the company shall be replaced by a new independent director within a period of not more than one hundred and eighty days from the date of such resignation or removal, as the case may be.

(3) Where the company fulfils the requirement of independent directors in its Board even without filling the vacancy created by such resignation or removal, as the case may be, the requirement of replacement by a new independent director shall not apply.

VII. Separate meetings:

(1) The independent directors of the company shall hold at least one meeting in a year, without the attendance of non-independent directors and members of management;

(2) All the independent directors of the company shall strive to be present at such meeting;

(3) The meeting shall :

(a) review the performance of non-independent directors and the Board as a whole;

(b) review the performance of the Chairperson of the company, taking into account the views of executive directors and non-executive directors;

(c) assess the quality, quantity and timeliness of flow of information between the company management and the Board that is necessary for the Board to effectively and reasonably perform their duties.

VIII. Evaluation mechanism:

(1) The performance evaluation of independent directors shall be done by the entire Board of Directors, excluding the director being evaluated.

(2) On the basis of the report of performance evaluation, it shall be determined whether to extend or continue the term of appointment of the independent director.

Under Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015:

RIGHTS OF INDEPENDENT DIRECTOR:

According to Regulation 4(2)(f)(iii)(14), the board of directors and senior management shall facilitate the independent directors to perform their role effectively as a member of the board of directors and also a member of a committee of board of directors.

DEFINITION OF INDEPENDENT DIRECTOR:

Regulation 16(1)(b) provides that “independent director” means a non-executive director, other than a nominee director of the listed entity:

(i) who, in the opinion of the board of directors, is a person of integrity and possesses relevant expertise and experience;

(ii) who is or was not a promoter of the listed entity or its holding, subsidiary or associate company;

(iii) who is not related to promoters or directors in the listed entity, its holding, subsidiary or associate company;

(iv) who, apart from receiving director’s remuneration, has or had no material pecuniary relationship with the listed entity, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year;

(v) none of whose relatives has or had pecuniary relationship or transaction with the listed entity, its holding, subsidiary or associate company, or their promoters, or directors, amounting to two per cent. or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed from time to time, whichever is lower, during the two immediately preceding financial years or during the current financial year;

(vi) who, neither himself, nor whose relative(s) —

(A) holds or has held the position of a key managerial personnel or is or has been an employee of the listed entity or its holding, subsidiary or associate company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed;

(B) is or has been an employee or proprietor or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of —

(1) a firm of auditors or company secretaries in practice or cost auditors of the listed entity or its holding, subsidiary or associate company; or

(2) any legal or a consulting firm that has or had any transaction with the listed entity, its holding, subsidiary or associate company amounting to ten per cent or more of the gross turnover of such firm;

(C) holds together with his relatives two per cent or more of the total voting power of the listed entity; or

(D) is a chief executive or director, by whatever name called, of any non-profit organisation that receives twenty-five per cent or more of its receipts or corpus from the listed entity, any of its promoters, directors or its holding, subsidiary or associate company or that holds two per cent or more of the total voting power of the listed entity;

(E) is a material supplier, service provider or customer or a lessor or lessee of the listed entity;

(vii) who is not less than 21 years of age.

COMPOSITION OF BOARD OF DIRECTORS:

Regulation 17(1) envisages that the composition of board of directors of the listed entity shall be as follows:

  • board of directors shall have an optimum combination of executive and non-executive directors with at least one woman director and not less than fifty percent of the board of directors shall comprise of non-executive directors;
Chairperson Composition
Where the chairperson of the board of directors is a non-executive director

 

At least one-third of the board of directors shall comprise of independent directors
Where the chairperson of the board of directors is not a non-executive director

 

At least half of the board of directors shall comprise of independent directors

 

Where the regular non-executive chairperson is a promoter of the listed entity or is related to any promoter or person occupying management positions at the level of board of director or at one level below the board of directors, At least half of the board of directors of the listed entity shall consist of independent directors.

 

Explanation- For the purpose of this clause, the expression “related to any promoter” shall have the following meaning:

(i) if the promoter is a listed entity, its directors other than the independent directors, its employees or its nominees shall be deemed to be related to it;

(ii) if the promoter is an unlisted entity, its directors, its employees or its nominees shall be deemed to be related to it.

DUTIES OF INDEPENDENT DIRECTOR:

Regulation 17(5) provides that the board of directors shall lay down a code of conduct for all members of board of directors and senior management of the listed entity. The code of conduct shall suitably incorporate the duties of independent directors as laid down in the Companies Act, 2013.

FEES OR COMPENSATION:

According to Regulation 17(6), the board of directors shall recommend all fees or compensation, if any, paid to non-executive directors, including independent directors and shall require approval of shareholders in general meeting.

The requirement of obtaining approval of shareholders in general meeting shall not apply to payment of sitting fees to non-executive directors, if made within the limits prescribed under the Companies Act, 2013 for payment of sitting fees without approval of the Central Government.

The approval of shareholders mentioned in clause (a), shall specify the limits for the maximum number of stock options that may be granted to non-executive directors, in any financial year and in aggregate.

Independent directors shall not be entitled to any stock option.

PERFORMANCE EVALUATION:

Regulation 17(10) provides the performance evaluation of independent directors shall be done by the entire board of directors.

Provided that in the above evaluation the directors who are subject to evaluation shall not participate.

MEMBERSHIP IN DIFFERENT COMMITTEES:

The Independent Directors shall hold membership/ chairpersonship in the following committees:

  1. AUDIT COMMITTEE:

Regulation 25 provides that every listed entity shall constitute a qualified and independent audit committee in accordance with the terms of reference, subject to the following:

(a) The audit committee shall have minimum three directors as members.

(b) Two-thirds of the members of audit committee shall be independent directors.

(c) All members of audit committee shall be financially literate and at least one member shall have accounting or related financial management expertise.

(d) The chairperson of the audit committee shall be an independent director and he shall be present at Annual general meeting to answer shareholder queries.

(e) The Company Secretary shall act as the secretary to the audit committee.

The quorum for audit committee meeting shall either be two members or one third of the members of the audit committee, whichever is greater, with at least two independent directors.

  1. NOMINATION AND REMUNERATION COMMITTEE:

Regulation 19 envisages that the board of directors of the Company shall constitute the nomination and remuneration committee as follows:

(a) the committee shall comprise of at least three directors;

(b) all directors of the committee shall be non-executive directors; and

(c) at least fifty percent of the directors shall be independent directors.

(d) the Chairperson of the nomination and remuneration committee shall be an independent director and he shall be present at Annual general meeting to answer shareholder queries.

CORPORATE GOVERNANCE REQUIREMENTS:

According to Regulation 24, at least one independent director on the board of directors of the listed entity shall be a director on the board of directors of an unlisted material subsidiary, incorporated in India.

OBLIGATIONS WITH RESPECT TO INDEPENDENT DIRECTORS:

Regulation 25 provides the following in regard to the obligations with respect to Independent Directors:

Limits on Directorships: A person shall not serve as an independent director in more than seven listed entities. Provided that any person who is serving as a whole time director in any listed entity shall serve as an independent director in not more than three listed entities.
Tenure: The maximum tenure of independent directors shall be in accordance with the Companies Act, 2013 and rules made thereunder, in this regard, from time to time.

Separate meeting: The independent directors of the listed entity shall hold at least one meeting in a year, without the presence of non-independent directors and members of the management and all the independent directors shall strive to be present at such meeting.

Performance evaluation: The independent directors in the meeting referred in sub-regulation (3) shall, interalia-

(a) review the performance of non-independent directors and the board of directors as a whole;

(b) review the performance of the chairperson of the listed entity, taking into account the views of executive directors and non-executive directors;

(c) assess the quality, quantity and timeliness of flow of information between the management of the listed entity and the board of directors that is necessary for the board of directors to effectively and reasonably perform their duties.

Liability: An independent director shall be held liable, only in respect of such acts of omission or commission by the listed entity which had occurred with his knowledge, attributable through processes of board of directors, and with his consent or connivance or where he had not acted diligently with respect to the provisions contained in these regulations.

Resignation/Removal: An independent director who resigns or is removed from the board of directors of the listed entity shall be replaced by a new independent director by listed entity at the earliest but not later than the immediate next meeting of the board of directors or three months from the date of such vacancy, whichever is later.

Provided that where the listed entity fulfils the requirement of independent directors in its board of directors without filling the vacancy created by such resignation or removal, the requirement of replacement by a new independent director shall not apply.

Familiarization Programme for Independent Directors: The listed entity shall familiarise the independent directors through various programmes about the listed entity, including the following:

(a) nature of the industry in which the listed entity operates;

(b) business model of the listed entity;

(c) roles, rights, responsibilities of independent directors; and

(d) any other relevant information.

Conclusion: From above, it can be rightly stated that the Independent Directors have a major role in improving the financial stability, independent and fresh decision making for the Company, boosting up and maintaining the confidence level of stakeholders, increasing the credibility, resolving the competing interest and synthesizes the perspectives of all the parties while enabling the Company to pursue the short and long- term business objectives.

Source: The Companies Act, 2013, rules and amendments made thereunder and Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015.

Disclaimer:  This article contains interpretation of the Act, Rules, Regulations and personal views of the author are based on such interpretation. Readers are advised either to cross check the views of the author with the Act or seek the expert’s views if they want to rely on contents of this article.

About Author: The above has been compiled by CS Varun Kapoor, an Associate Member of ICSI. His areas of interest include Companies Act, 2013, SEBI Act, Listing and Insider Trading Regulations etc. For any queries or suggestions, he can be approached at varun@vkacs.com or pcsvarunkapoor@gmail.com

Highlights of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations)

SEBI has notified SEBI (Listing  Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations) on September 2, 2015, after following the consultation process. A time period of ninety days has been given for implementing the Regulations.

However, two provisions of the regulations, which are facilitating in nature, are applicable with immediate effect. These pertain to

(i) passing of ordinary resolution instead of special resolution in case of all material related party transactions subject to related parties abstaining from voting on such resolutions, in line with the provisions of the companies Act, 2013, and

(ii) re-classification of promoters as public shareholders under various circumstances.

The Regulations shall be effective from 1st December, 2015.

The Listing regulations would consolidate and streamline the provisions of existing Listing Agreements for different segments of the capital market viz.

  • Equity (including convertibles) issued by entities listed on the Main Board of the Stock Exchanges, Small and Medium Enterprises listed on SME Exchange and Institutional Trading Platform,
  • Non- Convertible Debt Securities,
  • Non Convertible Redeemable Preference Shares,
  • Indian Depository Receipts,
  • Securitized Debt Instruments and
  • Units issued by Mutual Fund Schemes.

The Regulations have thus been structured to provide ease of reference by consolidating into one single document across various types of securities listed on the Stock exchanges.

KEY CHANGES AND OTHER MATERIAL CLAUSES (restricted to Equity Listing Agreement only):

1. Regulation 6- Compliance Officer and his Obligations:

(Corresponds to Clause 47a of the Listing Agreement)

1. A listed entity shall appoint a qualified Company Secretary(CS) as the Compliance Officer.

2. The compliance officer of the listed entity shall be responsible for-

(a) ensuring conformity with the regulatory provisions applicable to the listed entity in letter and spirit.

(b) co-ordination with and reporting to the Board, recognised stock exchange(s) and depositories with respect to compliance with rules, regulations and other directives of these authorities in manner as specified from time to time.

(c) ensuring that the correct procedures have been followed that would result in the correctness, authenticity and comprehensiveness of the information, statements and reports filed by the listed entity under these regulations.

(d) monitoring email address of grievance redressal division as designated by the listed entity for the purpose of registering complaints by investors:

Provided that the requirements of this regulation shall not be applicable in the case of units issued by mutual funds which are listed on recognised stock exchange(s) but shall be governed by the provisions of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996.

Comments: Only qualified CS, member of ICSI, shall be Compliance Officer.

2. Regulation 13(3)- Grievance Redressal Mechanism: The listed entity shall file with the recognised stock exchange(s) on a quarterly basis, within twenty one days from the end of each quarter, a statement giving the number of investor complaints pending at the beginning of the quarter, those received during the quarter, disposed of during the quarter and those remaining unresolved at the end of the quarter.

Comments: As Regulation13(3) mandates as aforesaid, one more quarterly compliance is in queue, the Listed Company has to file such statement on quarterly basis mandatorily.

3. Regulation 13(4)- Grievance Redressal Mechanism: The statement as specified in sub-regulation (3) shall be placed, on quarterly basis, before the board of directors of the listed entity.

Comments: The agenda and notes to agenda of Board Meeting(quarterly) shall include the above and the Board of Directors shall review and consider the same.

4. Regulation 15- Applicability

(Corresponds to Clause 49 of the Listing Agreement)

1. The compliance with the corporate governance provisions as specified in regulations 17, 18, 19, 20, 21,22, 23, 24, 25, 26, 27 and clauses (b) to (i) of sub-regulation (2) of regulation 46 and para C , D and E of Schedule V shall not apply, in respect of –

(a) the listed entity having paid up equity share capital not exceeding rupees ten crore and net worth not exceeding rupees twenty five crore, as on the last day of the previous financial year:

Provided that where the provisions of the regulations specified in this regulation becomes applicable to a listed entity at a later date, such listed entity shall comply with the requirements those regulations within six months from the date on which the provisions became applicable to the listed entity.

(b) the listed entity which has listed its specified securities on the SME Exchange:

Provided that for other listed entities which are not companies, but body corporate or are subject to regulations under other statues, the provisions of corporate governance provisions as specified in regulation 17, 18, 19, 20, 21,22, 23, 24, 25, 26, 27 and clauses (b) to (i) of sub-regulation (2) of regulation 46 and para C , D and E of Schedule V shall apply to the extent that it does not violate their respective statutes and guidelines or directives issued by the relevant authorities.

2. Notwithstanding with above, the provisions of Companies Act,2013 shall continue to apply, wherever applicable.

5. Regulation 27- Other corporate governance requirements:

(Corresponds to Clause 49 of the Listing Agreement )

1. The listed entity shall submit a quarterly compliance report on corporate governance in the format as specified by the Board from time to time to the recognised stock exchange(s) within fifteen days from close of the quarter.

2. Details of all material transactions with related parties shall be disclosed along with the Corporate Governance report.

3. The Corporate Governance report shall be signed either by the compliance officer or the chief executive officer of the listed entity.

6. Regulation 31 -Holding of specified securities and shareholding pattern:

(Corresponds to Clause 35 of the Listing Agreement)

1. The listed entity shall submit to the stock exchange(s) a statement showing holding of securities and shareholding pattern separately for each class of securities, in the format specified by the Board from time to time within the following timelines –

(a) one day prior to listing of its securities on the stock exchange(s);

(b) on a quarterly basis, within twenty one days from the end of each quarter; and,

(c) within ten days of any capital restructuring of the listed entity resulting in a change exceeding two per cent of the total paid-up share capital:

Provided that in case of listed entities which have listed their specified securities on SME Exchange, the above statements shall be submitted on a half yearly basis within twenty one days from the end of each half year.

2. The listed entity shall ensure that hundred percent of shareholding of promoter(s) and promoter group is in dematerialized form and the same is maintained on a continuous basis in the manner as specified by the Board.

3. The listed entity shall comply with circulars or directions issued by the Board from time to time with respect to maintenance of shareholding in dematerialized form.

7. Regulation 33- Financial results:

(Corresponds to Clause 41 of the Listing Agreement)

1. While preparing financial results, the listed entity shall comply with the following:

(a) The financial results shall be prepared on the basis of accrual accounting policy and shall be in accordance with uniform accounting practices adopted for all the periods.

(b) The quarterly and year to date results shall be prepared in accordance with the recognition and measurement principles laid down in Accounting Standard 25 or Indian Accounting Standard 31 (AS 25/ Ind AS 34 – Interim Financial Reporting), as applicable, specified in Section 133 of the Companies Act, 2013 read with relevant rules framed thereunder or as specified by the Institute of Chartered Accountants of India, whichever is applicable.

Provided that in addition to the above, the listed entity may also submit the financial results, as per the International Financial Reporting Standards notified by the International Accounting Standards Board.

(d) The listed entity shall ensure that the limited review or audit reports submitted to the stock exchange(s) on a quarterly or annual basis are to be given only by an auditor who has subjected himself to the peer review process of Institute of Chartered Accountants of India and holds a valid certificate issued by the Peer Review Board of the Institute of Chartered Accountants of India.

(e) The listed entity shall make the disclosures specified in Part A of Schedule IV.

2. The approval and authentication of the financial results shall be done by listed entity in the following manner:

(a) The quarterly financial results submitted shall be approved by the board of directors:

Provided that while placing the financial results before the board of directors, the chief executive officer and chief financial officer of the listed entity shall certify that the financial results do not contain any false or misleading statement or figures and do not omit any material fact which may make the statements or figures contained therein misleading.

(b) The financial results submitted to the stock exchange shall be signed by the chairperson or managing director, or a whole time director or in the absence of all of them; it shall be signed by any other director of the listed entity who is duly authorized by the board of directors to sign the financial results.

(c) The limited review report shall be placed before the board of directors, at its meeting which approves the financial results, before being submitted to the stock exchange(s).

(d) The annual audited financial results shall be approved by the board of directors of the listed entity and shall be signed in the manner specified in clause (b) of sub-regulation (2).

3. The listed entity shall submit the financial results in the following manner:

(a) The listed entity shall submit quarterly and year-to-date standalone financial results to the stock exchange within forty-five days of end of each quarter, other than the last quarter.

(b) In case the listed entity has subsidiaries, in addition to the requirement at clause (a) of sub-regulation (3), the listed entity may also submit quarterly/year-to-date consolidated financial results subject to following:

(i) the listed entity shall intimate to the stock exchange, whether or not listed entity opts to additionally submit quarterly/year-to-date consolidated financial results in the first quarter of the financial year and this option shall not be changed during the financial year.

Provided that this option shall also be applicable to listed entity that is required to prepare consolidated financial results for the first time at the end of a financial year in respect of the quarter during the financial year in which the listed entity first acquires the subsidiary.

(ii) in case the listed entity changes its option in any subsequent year, it shall furnish comparable figures for the previous year in accordance with the option exercised for the current financial year.

(c) The quarterly and year-to-date financial results may be either audited or unaudited subject to the following:

(i) In case the listed entity opts to submit unaudited financial results, they shall be subject to limited review by the statutory auditors of the listed entity and shall be accompanied by the limited review report.

Provided that in case of public sector undertakings this limited review may be undertaken by any practicing Chartered Accountant.

(ii) In case the listed entity opts to submit audited financial results, they shall be accompanied by the audit report.

(d) The listed entity shall submit audited standalone financial results for the financial year, within sixty days from the end of the financial year along with the audit report and either Form A (for audit report with unmodified opinion) or Form B (for audit report with modified opinion):

Provided that if the listed entity has subsidiaries, it shall, while submitting annual audited standalone financial results also submit annual audited consolidated financial results along with the audit report and either Form A (for audit report with unmodified opinion) or Form B (for audit report with modified opinion).

(e) The listed entity shall also submit the audited financial results in respect of the last quarter along-with the results for the entire financial year, with a note stating that the figures of last quarter are the balancing figures between audited figures in respect of the full financial year and the published year-to-date figures upto the third quarter of the current financial year.

(f) The listed entity shall also submit as part of its standalone or consolidated financial results for the half year, by way of a note, a statement of assets and liabilities as at the end of the half-year.

4. The applicable formats of the financial results and Form A (for audit report with unmodified opinion) & Form B (for audit report with modified opinion) shall be in the manner as specified by the Board from time to time.

5. For the purpose of this regulation, any reference to “quarterly/quarter” in case of listed entity which has listed their specified securities on SME Exchange shall be respectively read as “half yearly/half year” and the requirement of submitting ‘year-to-date’ financial results shall not be applicable for a listed entity which has listed their specified securities on SME Exchange.

6. The Form B and the accompanying annual audit report submitted in terms of clause (d) of sub-regulation (3) shall be reviewed by the stock exchange(s) and Qualified Audit Report Review Committee in manner as specified in Schedule VIII.

7. The listed entity shall on the direction issued by the Board, carry out the necessary steps, for rectification of modified opinion and/or submission of revised pro-forma financial results, in the manner specified in Schedule VIII.

8. Regulation 46- Website:

(Corresponds to Clause 54 of the Listing Agreement)

1. The listed entity shall maintain a functional website containing the basic information about the listed entity.

2. The listed entity shall disseminate the following information on its website:

(a) details of its business;

(b) terms and conditions of appointment of independent directors;

(c) composition of various committees of board of directors;

(d) code of conduct of board of directors and senior management personnel;

(e) details of establishment of vigil mechanism/ Whistle Blower policy;

(f) criteria of making payments to non-executive directors , if the same has not been disclosed in annual report;

(g) policy on dealing with related party transactions;

(h) policy for determining ‘material’ subsidiaries;

(i) details of familiarization programmes imparted to independent directors including the following details:-

(i) number of programmes attended by independent directors (during the year and on a cumulative basis till date),

(ii) number of hours spent by independent directors in such programmes (during the year and on cumulative basis till date), and

(iii) other relevant details

(j) the email address for grievance redressal and other relevant details;

(k) contact information of the designated officials of the listed entity who are responsible for assisting and handling investor grievances;

(l) financial information including:

(i) notice of meeting of the board of directors where financial results shall be discussed;

(ii) financial results, on conclusion of the meeting of the board of directors where the financial results were approved;

(iii) complete copy of the annual report including balance sheet, profit and loss account, directors report, corporate governance report etc;

(m) shareholding pattern;

(n) details of agreements entered into with the media companies and/or their associates, etc;

(o) schedule of analyst or institutional investor meet and presentations made by the listed entity to analysts or institutional investors simultaneously with submission to stock exchange;

(p) new name and the old name of the listed entity for a continuous period of one year, from the date of the last name change;

(q) items in sub-regulation (1) of regulation 47 .

(3) (a) The listed entity shall ensure that the contents of the website are correct.

(b) The listed entity shall update any change in the content of its website within two working days from the date of such change in content.

Source: SEBI Press release dated September 03, 2015 regarding SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations) along with Listing Regulations.

Disclaimer: This article contains comments and personal views of the author are based on such interpretation. Readers are advised either to cross check the views of the author with the Regulations or seek the expert’s views if they want to rely on contents of this article.

About Author: The above has been compiled by CS Varun Kapoor, an Associate Member of ICSI, presently working as a Company Secretary and Compliance Officer. His areas of interest include Corporate and Allied Laws and advisory services vis a vis SEBI, Listing Agreement etc. For any queries or suggestions, he can be approached at csvarunkapoor@gmail.com, Contact No- 9899110705.

All about Foreign Companies

In General, a foreign company is a company which is incorporated outside India but having its place of business in India.

To understand more about Foreign Company, let’s discuss some important definitions:

Definition of Company under Companies Act, 2013

Section 2(20):Company means a company incorporated under this Act or under any previous company law.

Definition of Body Corporate under Companies Act, 2013

Section 2(11):Body Corporate or Corporation includes a Company incorporated outside India, but does not include-

  1. A co-operative society registered under any law relating to co-operative societies; and
  2. Any other body corporate (not being a company defined in this act), which the Central Government may by notification specify in this behalf.

Definition of Foreign Company under Companies Act, 2013 vs. Companies Act, 1956:

Foreign Company under Companies Act 1956 – Section 591 Foreign Company as per Companies Act, 2013 – Section 2(42)
Company incorporated outside India and having a place of business in India Company or Body Corporate incorporated outside India having

a.       a place of business in India whether by itself or through an agent, physically or through electronic mode and

b.      conducts any business activity in India in any other manner.

The Companies Act, 2013 has the potential to impact a large number of Foreign Companies that may be doing business in India through electronic mode. The registration requirement of companies doing business in India through ‘electronic mode’ has been the subject matter of discussions and debates. Rule 2 (c) of the Companies (Registration of Foreign Companies) Rules, 2014 defines ‘electronic mode’ as carrying out electronically based, whether main server is installed in India or not, including but not limited to-

  1. Business to business and business to consumer transactions, data interchange and other digital supply transactions;
  2. offering to accept deposits or inviting deposits or accepting deposits or subscriptions in securities in India or from citizens of India;
  3. financial settlements, web based marketing, advisory and transactional services, database services and products, supply chain management;
  4. online services such as telemarketing, telecommuting, telemedicine, education and information research; and
  5. all related data communication services.

These transactions may be conducted by e-mail, mobile devices, social media, cloud computing, document management, voice or data transmission or otherwise.

Impact of change in definition of Foreign Companies
The New Act has drastically expanded the definition of Foreign Companies to include those foreign companies as well that are doing business in India through electronic mode. As discussed earlier, Rule 2 (c) defines ‘electronic mode’, which definition is wide enough to cover virtually every transaction carried through electronic mode including through e-mail, mobile devices, social media, cloud computing, document management, voice or data transmission or otherwise. Such a wide coverage on transactions done through electronic modes is, therefore, likely to have a great impact on various foreign companies involved in transactions such as consultancy services, financial services, e-commerce etc. with their customers in India that would be required to establish a permanent place of work in India through registration, in order to continue to operate in the country.

Currently, there are a number of foreign based websites that operate directly or indirectly in India and may be said to have a place of business in India through electronic mode such as Amazon.com, Rakuten.com etc., where customers located in India can purchase products and get the shipment in India. Moreover, ebooks, softwares, or subscription to e-magazines, dailies or subscription of other members only websites could be purchased online at many websites that need no physical shipment to India. The New Act specifically provides that in order to ascertain the place of business in India through electronic mode, the main server is not required to be installed in India.

The bare perusal of the provisions of the New Act (esp. section 380 and section 2 (42) along with prescribed Rules) suggests that even a single transaction conducted in India by a foreign company would be sufficient to infer that such foreign company has established a place of business in India. Such an interpretation would lead to undesirable consequences as any foreign company e.g. a consultancy company based outside India would require registration in India even if it undertakes only one single transaction in a whole year. Imagine a situation where a customer in India buys an application or software worth $1 on a foreign based marketplace websites like googleplaystore that may not be registered in India. The marketplace websites could have sellers that are also not registered in India as per the requirement of section 380. In such a case, it would be absurd to expect that for the sale of a $1 product/service both the seller company as well as the marketplace owner company be required to get registered under the New Act. However, as absurd as it may appear, the bare interpretation of the New Act leads to this conclusion

So from above, it is clear that foreign companies must comply with the provisions of the Companies Act, 2013 in respect to the business as if it were a company incorporated in India.

The Companies Act, 2013 aims to:

  • revise and modify the Companies Act, 1956 in consonance with the changes in the national and international economy;
  • bring about compactness by deleting the provisions that had become redundant over time and by regrouping the scattered provisions relating to specific subjects;
  • re-write various provisions of the Companies Act,1956 to enable easy interpretation;
  • delink the procedural aspects from the substantive law and provide greater flexibility in rule making to enable adaptation to the changing economic and technical environment; and,
  • inculcate the culture of corporate governance in the Indian corporate world.

Compliances for Foreign Companies under Companies Act, 2013 and rules made thereunder:

  1. Chapter XXII
  2. Companies(Registration of Foreign Companies) Rules, 2014

Section 380: Documents etc., to be delivered to Registrar by Foreign Companies:

Every Foreign company is required to submit these documents to the Registrar for registration, within 30 days of the establishment of its place of business in India:

  1. Certified copy of the charter, statutes or memorandum and articles, of the company or other instrument constituting or defining the constitution of the company and, if the instrument is not in the English language, a certified translation thereof in the English language;
  2. Full address of the registered or principal office of the company
  3. List of the directors and secretary of the company containing such particulars as prescribed under Rule 3.
  4. Name and address or the names and addresses of one or more persons resident in India authorised to accept on behalf of the company service of process and any notices or other documents required to be served on the company
  5. Full address of the office of the company in India which is deemed to be its principal place of business in India
  6. Particulars of opening and closing of a place of business in India on earlier occasion or occasions
  7. Declaration that none of the directors of the company or the authorized representative in India has ever been convicted or debarred from formation of companies and management in India or abroad.
  8. Other Documents as may be prescribed.

Rule 3(3) of the Companies (Registration of Foreign Companies) Rules, 2014 requires application in FormFC-1 to be supported with an attested copy of approval from the Reserve Bank of India under Foreign Exchange Management Act and the rules and regulations thereunder or a declaration from the authorisedrepresentative of such Foreign Company that no such approval is required.

And Rule 3(4) provides that in case of any alteration in the aforesaid documents the Foreign Company is require to submit a return in FormFC-2 containing the particulars of alteration as per the prescribed format with the Registrar of Companies, within 30 days of any such alteration.

Section 381: Accounts of Foreign Companies:

The Foreign Companies in each calendar year are required to prepare a balance sheet and profit & loss account in such form, containing such particulars and shall also annex the documents as prescribed under Rule 4 along with the balance sheet and profit & loss account. All these documents shall be filed with Registrar of Companies along with a copy of list of all the places where business has been established in India as on the date of the balance Sheet in Form FC-3.

If any of such documents is not in English Language, a certified translation of these documents in English Language shall be attached.

And Rule 5 providesthat every foreign company shall get its accounts, pertaining to the Indian business operations prepared in accordance with the requirements ofsection 381 and rule 4, audited by a practicing Chartered Accountant in India or a firm or limited liability partnership of practicing chartered accountants.

The provisions of Chapter X i.e. Audit and Auditors and rules made there under, as far as applicable, shall apply, mutatis mutandis, to the foreign company.

Section 382: Display of Name of Foreign Companies:

Every Foreign Company is required to exhibit outside its every office or place of business in India, and in all business letters, bill heads and letter paper, and in all notices, and other official publications, the name of the company and the country where it is incorporated. The name shall be in legible letters of English language and also in the local language of the state where such office is situated.

Besides the name and the country of Incorporation, the company is also required to mention the fact that the liability of the company is limited if it is so.

Section 383: Service on Foreign Company:

Any process, notice, or other document required to be served on a foreign company shall be addressed to the person whose name and address have been delivered to the Registrar and sent by post or by electronic mode. The documents on Foreign Company as per the New Act may now also be served by Electronic Mode.
Section 384:Debentures,Annual Return, Registration of Charges, Books of Accounts and their Inspection

Debentures:

The provisions of Section 71 shall apply mutatis mutandis to a foreign company.

Annual Return:

The provisions of Section 92 shall subject to such exceptions, modification and adaptations as may be made therein by rules made under this act, apply to a foreign company as they apply to a foreign company as they apply to a company incorporated in India.

Also, Rule 7 provides that every foreign company shall prepare and file, within a period of sixty days from the last day of its financial year, to the Registrar annual return in Form FC.4 along with such fee as provided in the Companies (Registration Offices and Fees) Rules, 2014 containing the particulars as they stood on the close of the financial year.

Books of Accounts:

The provisions of Section 128 shall apply to a foreign company to the extent of requiring it to keep at its principal place of business in India, the books of account referred to in that section, with respect to monies received and spent, sales and purchases made, and assets and liabilities, in the course of or in relation to its business in India.

Registration of Charges:

Companies Act 1956: As per Section 600 read with Section 125 of the Companies Act 1956 charges on properties in India which are created by a Foreign Companies and charges on properties in India which is acquired by any Foreign Company shall be registered with Registrar.

Companies Act 2013:The provisions of Chapter VI shall apply mutatis mutandis to charges on properties which are created or acquired by any foreign company. As per Section 384 read with Section 77 of the Companies Act 2013 charges on properties which are created or acquired by any Foreign Companies whether situated in or outside India shall be registered with Registrar. Under Companies Act 2013 properties need not be situated in India. Foreign Companies shall register charges on properties which are created or acquired by Foreign Companies whether situated in or outside India with Registrar.

Inspection:

The provisions of Chapter XIV shall apply mutatis mutandis to the Indian business of a foreign company as they apply to a company incorporated in India.

Section 391: Application of sections 34 to 36 and Chapter XX

The provisions of sections 34 to 36 (both inclusive) shall apply to—

  • the issue of a prospectus by a company incorporated outside India under section 389 as they apply to prospectus issued by an Indian company;
  • the issue of Indian Depository Receipts by a foreign company.

The provisions of Chapter XX (Winding Up) shall apply mutatis mutandis for closure of the place of business of a foreign company in India as if it were a company incorporated in India.

Section 392: Punishment for Contravention

Without prejudice to the provisions of section 391, if a foreign company contravenes the provisions of this Chapter, the foreign company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees and in the case of a continuing offence, with an additional fine which may extend to fifty thousand rupees for every day after the first during which the contravention continues and every officer of the foreign company who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than twentyfive thousand rupees but which may extend to five lakh rupees, or with both.

Provisions for raising capital

Typically, foreign companies operating in India do not access Indian capital markets. They can raise capital privately from Indian investors or banks and financial institutions in India.

In case they want to access capital publicly, they need to issue a prospectus. There are certain documents specified under Rule 11 of Companies (Registration of Foreign Companies) Rules, 2014that shall be annexed to the prospects such as

  • consent required from any person as an expert,
  • a copy of contracts for appointment of managing director or manager,
  • a copy of any other material contracts, not entered in the ordinary course of business, but entered within preceding two years,
  • a copy of underwriting agreement etc.

Typically, securities issued are Indian Depository Receipts (IDRs) and not shares, because the company is incorporated offshore. Foreign company can make an issue of Indian Depository Receipts (IDRs) only when such company complies with the conditions mentioned under Rule 13 of Companies (Registration of Foreign Companies) Rules, 2014, in addition to the Chapter X of Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 and any directions issued by the Reserve Bank of India. IDRs have not been popular with only Standard Chartered Bank issuing them since the route has been made available to foreign companies.

Winding up

A foreign company may be wound up as an unregistered company if it ceases to carry on business in India, whether the body corporate has been dissolved or otherwise ceased to exist as per the law under which it was incorporated. (Refer to section 376 of Companies Act, 2013)

 Compliances under Foreign Exchange Management Act (FEMA) 1999

  • An offshore business which has a direct Indian operation in India (and is not operating through an agent) will be treated as one of Liaison Office (LO), Branch Office (BO) or Project Office (PO), for which Reserve Bank of India (RBI) under provisions of the FEMA
  • After establishment, all new entities setting up LO/BO/PO shall submit a report containing information, as per format provided in Annex 3 within five working days of the LO/BO becoming functional to the Director General of Police (DGP) of the state concerned in which LO/BO has established its office.
  • Branch Offices / Liaison Offices have to file Annual Activity Certificates (AAC) (Annex 4) from Chartered Accountants, at the end of March 31, along with the audited Balance Sheet on or before September 30 of that year.AAC certifies that the company is undertaking only those activities which are permitted by the Reserve bank.
  • At the time of winding up of Branch/Liaison/ Project Office the company has to approach the designated AD Category – I bank with the documents prescribed.
  • Annual return on Foreign Liabilities and Assets has been notified under FEMA 1999 and it is required to be submitted by all the India resident companies which have received FDI and/ or made overseas investment in any of the previous year(s), including current year by July 15 every year. Non-filing of the return before due date will be treated as a violation of FEMA and penalty clause may be invoked for violation of FEMA.

Source: Companies Act, 2013 and rules made thereunder, Foreign Exchange Management Act, 1999 & rules made thereunder and RBI Guidelines

Disclaimer:  This article contains interpretation of the Act, Rules and views of the author are based on such interpretation. Readers are advised either to cross check the views of the author with the Act or seek the expert’s views if they want to rely on contents of this article.

About Author:The above has been compiled by CS Varun Kapoor, an Associate Member of ICSI. His areas of interest include Corporate and Allied Laws and advisory servicesvis a vis SEBI, Listing Agreement etc. For any queries or suggestions, he can be approached at varun@vkacs.com, Contact No- 9899110705.

Website- An Eye ofCompliance in Letter and Spirit

In this modern era, people and companies are on the internet for exchanging of information and communication. Website becomes an essential source to carry out the business smoothly.I will talk about the compliance point of view. Regulators may visit your website for the information as and when required by them. The disclosures on the website not only fulfill compliance requirements but also encourage the investors to be with the Company with keen interest and also attract new investors to associate with the Company. The Compliance with respect to website should be in true letter and spirit. In true letter sense, it may confer that the disclosures as required under applicable laws to the Company while the spirit confers that disclosures as per the Company’s policy for proper Corporate Governance.

One of the pillars of the Corporate Governance is “Transparency” which clearly signifies the Company to ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company.

I tried to gather various disclosures/information required to be published on the Website of the Company (including but not limited to Listed Company), if any, under various laws applicable to the Company:

UNDER COMPANIES ACT, 2013:

Applicable to Company registered under this Act or under any previous company law:

 In purview of Section 13(8)(i):A Company, which has raised money from public through prospectus and still has any unutilized amount out of the money so raised, shall not change its objects for which it raised the money through prospectus unless a special resolution is passed by the company and—

(i) the details, as may be prescribed, in respect of such resolution shall also be published in the newspapers (one in English and one in vernacular language) which is in circulation at the place where the registered office of the company is situated and shall also be placed on the website of the company, if any, indicating therein the justification for such change;

(ii) the dissenting shareholders shall be given an opportunity to exit by the promoters and shareholders having control in accordance with regulations to be specified by the Securities and Exchange Board.

Penalty for Non- Compliance:The Company and every officer of the company who is in default or such other person shall be punishable with fine which may extend to ten thousand rupees and where the contravention is continuing one with a further fine which may extend to one thousand rupees for every day after the first during which the contravention continues.

  1. In purview of Section 73 read with Rule 4(3) of Companies (Acceptance of Deposits) Rules, 2014: Every Company inviting deposits from the public shall upload a copy of the circular on its website, if any.

Penalty for Non- Compliance:The Company and every officer of the company who is in default or such other person shall be punishable with fine which may extend to ten thousand rupees and where the contravention is continuing one with a further fine which may extend to one thousand rupees for every day after the first during which the contravention continues.

 In purview of Section 91 read with Rule 10(1) of the Companies (Management & Administration) Rules, 2014:The Company to post the notice of closure of the register of members/debenture holders/other security holders on its website.

Penalty for Non- Compliance:The Company and every officer of the company who is in default or such other person shall be punishable with fine which may extend to ten thousand rupees and where the contravention is continuing one with a further fine which may extend to one thousand rupees for every day after the first during which the contravention continues.

  1. In purview of Section 101:The Company to post the notice of general meeting on its website.

Penalty for Non- Compliance:The Company and every officer of the company who is in default or such other person shall be punishable with fine which may extend to ten thousand rupees and where the contravention is continuing one with a further fine which may extend to one thousand rupees for every day after the first during which the contravention continues.

  1. In purview of Section 108 read with Rule 20(3)(ii) of the Companies (Management & Administration) Rules, 2014: The Company to post the notice of general meeting where electronic Voting facility is provided, on its website.

Penalty for Non- Compliance:The Company and every officer of the company who is in default or such other person shall be punishable with fine which may extend to ten thousand rupees and where the contravention is continuing one with a further fine which may extend to one thousand rupees for every day after the first during which the contravention continues.

  1. In purview of Section 108 read with Rule 20(3)(ii) of the Companies (Management & Administration) Rules, 2014:The Company to post the results declared along with the scrutinizer’s report shall be placed on its website within 2 days of passing the resolution at the relevant general meeting of the members.

Penalty for Non- Compliance:The Company and every officer of the company who is in default or such other person shall be punishable with fine which may extend to ten thousand rupees and where the contravention is continuing one with a further fine which may extend to one thousand rupees for every day after the first during which the contravention continues.

 In purview of Section 110 read with Rule 22(4) of Companies (Management and Administration) Rules, 2014:The Company to post the Notice of Postal Ballot forthwithon its website.

Penalty for Non- Compliance:The Company and every officer of the company who is in default or such other person shall be punishable with fine which may extend to ten thousand rupees and where the contravention is continuing one with a further fine which may extend to one thousand rupees for every day after the first during which the contravention continues.

  1. In purview of Section 135(4)(i) read with Rule 9 of Companies (Corporate Social Responsibility Policy) Rules, 2014:The approved CSR policy shall be placed on the website of the Company as per the particulars specified in the Annexure in the ru

Penalty for Non- Compliance: The Company and every officer of the company who is in default or such other person shall be punishable with fine which may extend to ten thousand rupees and where the contravention is continuing one with a further fine which may extend to one thousand rupees for every day after the first during which the contravention continues.

 In purview of third proviso to Section 136(1):AListed Company shall also place its financial statements including consolidated financial statements, if any, and all other documents required to be attached thereto, on its website, which is maintained by or on behalf of the company.

In purview of fourth proviso to Section 136(1): Every Company having a subsidiary or subsidiaries shallplace separate audited accounts in respect of each of its subsidiary on its website.

Note: Fourth proviso states every Holding Company SHALL discloses the audited financial statements of each of its subsidiary on the website, if any.  

Penalty for Non- Compliance: The Company shall be liable to a penalty of twenty five thousand rupees and every officer of the Company who is in default shall be liable to a penalty of five thousand rupees.

Please Note: The Companies Amendment Bill, 2016 which was introduced in Lok Sabha, states an amendment in Section 136 which omits the requirement of publishing the audited accounts on the website of Company

  1. In purview of Section 168 read with Rule 15 of Companies (Appointment and         Qualification of Directors) Rules, 2014: The Company to post the information related to resignation of director on its website, if any.

Penalty for Non- Compliance: The Company and every officer of the Company who is in default shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees.

  1. In purview of first proviso to Section 177(10): The details of establishment of vigil mechanism shall be disclosed by the company on its website, if any, and in the Board’s report.

Penalty for Non- Compliance:The Company and every officer of the company who is in default or such other person shall be punishable with fine which may extend to ten thousand rupees and where the contravention is continuing one with a further fine which may extend to one thousand rupees for every day after the first during which the contravention continues.

  1. Schedule IV(4)(6)– The terms and conditions of appointment of independent directors shall also be posted on the company’s website.

Penalty for Non- Compliance: The Company and every officer of the company who is in default or such other person shall be punishable with fine which may extend to ten thousand rupees and where the contravention is continuing one with a further fine which may extend to one thousand rupees for every day after the first during which the contravention continues.

 UNDER SEBI (PROHIBITION OF INSIDER TRADING) REGULATIONS, 2015:

Applicable to every company whose securities are listed on stock exchanges:

Regulation 8 mandates the board of directors of every company, whose securities are listed on a stock exchange, to formulate and publish on its official website, a code of practices and procedures for fair disclosure of unpublished price sensitive information.

PENAL PROVISIONS:Although no separate penalties have been prescribed under the Regulations. For non-compliance of Regulation 8, reference can be made to Section 15 HB of SEBI Act, 1992 prescribes the penalty which shall not be less than one lakh rupees but which may extend to one crore rupees.

UNDER SEBI (LISTING OBLIGATIONS AND DISCLOSURE REQUIREMENTS) REGULATIONS, 2015:

 Regulation 3- Applicability of the regulations:Unless otherwiseprovided, these regulations shall apply to the listed entity whohas listed any of the following designated securities on recognised stockexchange(s):

(a) specified securities listed on main board or SME Exchange orinstitutional trading platform;

(b) non-convertible debt securities, non-convertible redeemable preferenceshares, perpetual debt instrument, perpetual non-cumulative preferenceshares;

(c) Indian depository receipts;

(d) securitised debt instruments;

(e) units issued by mutual funds;

(f) any other securities as may be specified by the Board.

UNDER CHAPTER III AND IV OF THE SEBI (LODR) REGULATIONS, 2015:

The following are the required disclosures which are to be placed on the official website of the listed entity which has listed its specified securities:

In purview of Regulation 30(4)(ii):The listed entity shall frame a policy for determination ofmateriality, based on criteria specified in this sub-regulation, dulyapproved by its board of directors, which shall be disclosed on itswebsite.

 In purview of Regulation 30(5):The board of directors of the listed entity shall authorize one ormoreKey Managerial Personnel for the purpose of determining materiality of anevent or information and for the purpose of making disclosures to stockexchange(s) under this regulation and the contact details of suchpersonnel shall be also disclosed to the stock exchange(s) and as well ason the listed entity’s website.

In purview of Regulation 30(8):The listed entity shall disclose on its website all such events orinformation which has been disclosed to stock exchange(s) under thisregulation, and such disclosures shall be hosted on the website of thelisted entity for a minimum period of five years and thereafter as per thearchival policy of the listed entity, as disclosed on its website.

In purview of Regulation 46:

  1. The listed entity shall maintain a functional website containing the basic information about the listed entity.

2. The listed entity shall disseminate the following information on its website:

(a)Details of its business;

(b)Terms and conditions of appointment of independent directors;

(c)Composition of various committees of board of directors;

(d)Code of conduct of board of directors and senior management personnel;

(e)Details of establishment of vigil mechanism/ Whistle Blower policy;

(f) Criteria of making payments to non-executive directors, if the same hasnot been disclosed in annual report;

(g)Policy on dealing with related party transactions;

(h)Policy for determining ‘material’ subsidiaries;

(i) Details of familiarization programmes imparted to independent directorsincluding the following details:-

(i) Number of programmes attended by independent directors (during theyear and on a cumulative basis till date),

(ii) Number of hours spent by independent directors in such programmes(during the year and on cumulative basis till date), and

(iii) Other relevant details

(j) The email address for grievance redressal and other relevant details;

(k) Contact information of the designated officials of the listed entity who areresponsible for assisting and handling investor grievances;

(l) Financial information including:

(i) Notice of meeting of the board of directors where financial resultsshall be discussed;

(ii)Financial results, on conclusion of the meeting of the board ofdirectors where the financial results were approved;

(iii) Complete copy of the annual report including balance sheet, profitand loss account,directors’ report, corporate governance report etc;

(m) Shareholding pattern;

(n)Details of agreements entered into with the media companies and/or theirassociates, etc;

(o)Schedule of analyst or institutional investor meet and presentations madeby the listed entity to analysts or institutional investors simultaneouslywith submission to stock exchange;

(p)New name and the old name of the listed entity for a continuous period ofone year, from the date of the last name change;

(q)Items in sub-regulation (1) of regulation 47- (mentioned below).

  1. (a) The listed entity shall ensure that the contents of the website are correct.

(b) The listed entity shall update any change in the content of its websitewithin two working days from the date of such change in content.

 In purview of Regulation 46:

  1. Notice of meeting of the board of directors where financial results shall bediscussed
  1. Financial results, as specified in regulation 33, along-with the modifiedopinion(s) or reservation(s), if any, expressed by the auditor:

Provided that if the listed entity has submitted both standalone andconsolidated financial results, the listed entity shall publish consolidatedfinancial results along-with (1) Turnover, (2) Profit before tax and (3) Profitafter tax, on a stand-alone basis, as a foot note; and a reference to theplaces, such as the website of listed entity and stock exchange(s), wherethe standalone results of the listed entity are available.

  1. Statements of deviation(s) or variation(s) as specified in sub-regulation(1) of regulation 32 on quarterly basis, after review by audit committee andits explanation in directors report in annual report;
  1. Notices given to shareholders by advertisement.

PROCEDURE FOR ACTION IN CASE OF DEFAULT:

Chapter XI contains the provisions relating to actions in case of non-compliance of these regulations:

 In purview of Regulation 98: Liability for contravention of the Act, rules or the regulations:

  1. The listed entity or any other person thereof who contravenes any of theprovisions of these regulations, shall, in addition to liability for action in termsof the securities laws, be liable for the following actions by the respectivestock exchange(s), in the manner specified in circulars or guidelines issuedby the Board:

(a) Imposition of fines;

(b) Suspension of trading;

(c) Freezing of promoter/promoter group holding of designated securities,as may be applicable, in coordination with depositories.

(d) any other action as may be specified by the Board from time to time

  1. The manner of revocation of actions specified in clauses (b) and (c) ofsub-regulation (1), shall be as specified in circulars or guidelines issued by theBoard.

In purview of Regulation 99:Failure to pay fine:

If listed entity fails to pay any fine imposed on it within such period asspecified from time to time, by the recognised stock exchange(s), after anotice in writing has been served on it, the stock exchange may initiate action.

The intention of the Chapter XI clearly indicates the disclosure requirements on website as mentioned in the regulations are not to be treated lightly. These are to be followed strictly as mandated by the legislature.

Source: Companies Act, 2013 and rules made and latest amendments thereunder, SEBI Act, 1992, SEBI (Prohibition of Insider Trading) Regulations, 2015and SEBI (LODR) Regulations, 2015

Disclaimer:  This article contains interpretation of the Act, Rules, Regulations and personal views of the author are based on such interpretation. Readers are advised either to cross check the views of the author with the Act or seek the expert’s views if they want to rely on contents of this article.

About Author:The above has been compiled by CS Varun Kapoor, an Associate Member of ICSI. His areas of interest include Companies Act, 2013, SEBI Act, Listing and Insider TradingRegulations etc. For any queries or suggestions, he can be approached at varun@vkacs.com, Contact No- 98-99-11-0705.