Shares with Differential voting Rights

4.1 As per Rule 4(1) (g) of the Companies (Share Capital and Debentures) Rules, 2014, a company would be prohibited from issuing any shares with differential voting rights, if it has defaulted on the repayment of loans from banks and public financial institutions or interest thereon, payment of dividend on preference shares, payment of statutory dues for employees, or in depositing moneys into the Investor Education and Protection Fund. There is no reference period for such default because of which it appears that any default, even if subsequently rectified, would prevent a company from issuing such shares. The Committee recommended that there should be a cooling off period of five years from the end of the financial year in which the said default was made good for a company to be eligible to issue such shares again. This may be provided for in the Rules.

Issue of Bonus Shares

4.2 As per Section 63(2)(a) of the Act, in order to allot bonus shares, a company should have taken authorisation from shareholders in the general meeting which need not be a special resolution. However, clause 5(e) of e-form PAS-3 requires the date of the special resolution and Service Request Number (SRN) of relevant form in which the special resolution was filed. In order to overcome this difficulty, the Committee recommended that clause 5(e) of PAS-3 be modified to replace the words ‘special resolution’ with the word ‘resolution’.

Conversion of Loans into equity

4.3 It was observed that Form PAS-3 treats ‘conversion of loans into shares’ as an allotment for consideration other than cash. The Committee felt, considering judicial precedents and earlier circulars issued under the Companies Act, 1956, that genuine debt (including External Commercial Borrowings) converted into shares should be treated as allotment for cash and recommended appropriate modification of Form PAS-3.

Change in number of members of a Guarantee company

4.4 The Committee noted that there is no requirement under the Act to intimate the Registrar of Companies of any change in the number of members of a Guarantee Company, which was earlier required under Section 97 of the Companies Act 1956. However, Rule 15 of the Companies (Share capital and Debentures) Rules, 2014 read with Section 64, prescribes filing of Form SH-7 with the ROC for any alteration of share capital and also provides a field for intimating any change in the number of members and date of special resolution approving the same. The Committee recommends that an appropriate modification in Rule 15 be carried out to mandate notifying the increase in number of members of a guarantee company as part of an increase/alteration of capital.

Issue of Debentures for period exceeding 10 years

4.5 It was represented by the stakeholders that Infrastructure finance companies as well as Infrastructure Debt Fund Non-Banking finance companies be allowed to issue secured debentures for a period exceeding ten years but not exceeding thirty years. However, Housing Finance companies regulated by National Housing Bank (NHB) have not been allowed to issue secured debentures for a period exceeding 10 years, putting them at the risk of asset - liability mismatch. The Committee noted that Housing Finance Companies (HFCs) have already been allowed by way of notification GSR 841 (E) dated 06.11.2015.

Creation of Debenture Redemption Reserve

4.6 Rule 18(7) (b) of the Companies (Share Capital and Debentures) Rules, 2014 requires the creation of Debenture Redemption Reserve (DRR) to the extent of twenty-five percent of the value of debentures by companies including manufacturing and infrastructure companies. The Committee felt that in such cases the amount available for other appropriations stand reduced and recommends that the Rule be modified to explicitly mention that companies be allowed to set aside DRR on a step down basis with reference to the redemption schedule for the next one year. It also recommended that a proviso be inserted that companies be allowed to appropriate any amount in excess of the DRR required for immediate redemption.

Maintenance of Liquid Funds for Redemption of Debentures

4.7 Rule 18(7)(c) of the Companies (Share Capital and Debentures) Rules, 2014 states that every company required to create DRR shall on or before the 30th day of April of each year, invest or deposit, as the case may be, a sum which shall not be less than fifteen percent of the amount of its debentures maturing during the year ending 31st day of March of the next year in specified methods. Though the Committee felt that it increases the cost of funds raised through Non-Convertible Debentures (NCDs), keeping the investors’ interest in view, no relaxation could be allowed for maintenance of liquid funds. The Committee recommended that clarification may also be provided in the Rules that maintenance of liquid funds and DRR would be essential, irrespective of whether a company has sufficient profits.

Creation of Security for Debentures

4.8 The mandate to secure only company(s) assets as security for debentures is placing a restriction on raising funds through debentures vis-à-vis bank borrowings as the banks accept (in fact insists) that the assets of all companies which form part of company(s) consolidated balance sheet or any other collateral security as security. The Committee felt that Rule 18(1)(b) may be amended so as to enable issue of debentures secured by charge on the properties or assets of the company or any other entity or any other collateral security. Rule 18(1)(d) should also enable creation of security for debentures in favour of the debenture trustee of movable property or any other collateral security which could either be of the company or any other entity.

Perpetual Debentures

4.9 It was represented to the Committee that the companies shall also be permitted to issue perpetual debentures on the lines of Section 120 of the 1956 Act since RBI allows banks and systemically important NBFCs to issue such debentures. Section 71(13) gives broad rule making powers on matters relating to debentures. The Committee felt that enabling provision for issue of perpetual debentures may be provided in the Rules.

Issue of sweat equity shares

4.10 Rule 8(4) of the Companies (Share Capital and Debentures) Rules, 2014 restricts the issue of sweat equity shares to twenty-five percent of paid up equity share capital. On suggestion by the stakeholders to relax the cap, the Committee deliberated on the issue of sweat equity shares in excess of the said twenty-five percent ceiling and recommended that start-ups, who may require such instruments may be permitted to issue sweat equity shares beyond twenty-five percent and up to fifty percent of the paid up equity share capital.

Issue of employee stock options (ESOPs)

4.11 Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014 restricts issue of ESOPs to promoters or promoter directors even if they are employees of the company. The Committee felt that, in order to encourage start-ups, this rule may be relaxed to enable issuance of ESOPs to promoters who may be working as employees or employee directors or whole time directors which would help the promoters to gain from increase in future valuation of the company without in any way impacting finances of the company during its initial years.

Preferential Allotments

4.12 Rule 13(2)(h) of the Companies (Share Capital and Debentures) Rules, 2014 states that in case of a preferential issue of convertible securities, ‘the price of securities to be issued on preferential basis shall be determined beforehand on the basis of a valuation report of a registered valuer’. Rule 13(3) states that “the price of shares or other securities to be issued on preferential basis shall not be less than the price determined on the basis of the valuation report of a registered valuer”. The Committee felt that, in practice, upfront determination of valuation of a ‘convertible security’ is too restrictive. The Committee recommended that Rule 13(2)(h) may be amended, to consider providing for convertible instruments to be valued at the time of conversion. It was felt that the formulation used in the FDI policy may be adopted.

4.13 Rule 13(2) (c) of the Companies (Share Capital and Debentures) Rules 2014 does not allow preferential allotment of partly paid-up shares. Department of Industrial Policy and Promotion vide its Press Note No. 9 (2015 Series) dated 15.09.2015 allows partly paid shares and warrants as eligible capital instruments for the purposes of FDI policy. The Committee recommended amending Rule 13(2)(c) to allow preferential allotment of partly paid-up shares.

Issue and Redemption of Preference Shares

4.14 Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 prescribes the terms and conditions for issue of securities through private placement under Section 42. Rule 9 of the Companies (Share Capital and Debentures) Rules, 2014 also provides for the conditions to be fulfilled by a company with respect to issue and redemption of preference shares under Section 55. Clarification had been sought during the public consultation as to whether both Rules have to be followed for issue of preference shares. The Committee felt that there is no ambiguity and the issuer of preference shares (which is covered under the definition of securities) needs to follow both the Rules.