Share Capital In Company Law

For mortgages, forty-two days start to run from the time of filing the mortgage instrument with the Registrar of titles. For debentures and other charges, the time shall run from the date of execution / creation. Any taxation levied at the time of conversion in any manner would amount to cannibalizing the neutrality promised by the amendment.

• Suppose the prime lending rate of the company is 10%, then the maximum amount of preference dividend, which can be offered, is 13%.
• The re-conversion of the stocks toward fully paid up shares can also be done additionally.
• In 2020, Edelweiss Group announced the selling of controlling stake in its Wealth Management Business to PAG, one of the world’s largest Asia-focused investment groups.
• Board, special resolutions authorizing buy-back of securities under section 68.
• Section 236 provides that the acquirer/person/group of persons under Section 236 shall offer to the minority shareholders of the company for buying the equity shares held by such shareholders at a price determined on the basis of valuation by a registered valuer in accordance with such rules as may be prescribed.

We are all aware that the Companies can convert its non-current liabilities into equity by complying with the applicable laws. However, the same cannot be said for current liabilities (for e.g. trade payables, advances, accrued expense etc.) since nothing has been clearly prescribed under the laws. Controlling (30%+) shareholders in companies with a premium listing are expected to enter into a relationship agreement with the issuer to ensure its independence.

Provisions Of Companies Act, 2013 For Conversion Of Loan Into Equity Share Capital

Once that is clear, the next step will be to determine whether the transaction fits into the limitations and provisions of the Act, following the Compliance requirements. Post receiving disclosure , the company shall take all the necessary steps to complete the compliances under Act. The company shall make detailed disclosure of the loan in the Board’s Report and Financial Statements. From above it is understood that to categorise any amount under loan it is important to determine whether the loan given by the director or his relative is out of his/their own funds and the declaration is received by the company to that effect. In India nowadays we are hearing a lot about ‘ease of doing business’, ‘creation of start-up friendly environment’ etc., in this context in my opinion the idea of attaining ‘ease of doing business’ or ‘start-up friendly environment’ lies at allowing entrepreneurs to follow the law with « letter and sprit ». Moreover, it is pertinent to note that Section 236 only uses the words “without prejudice to”, and does not use the words “notwithstanding anything contained in sub-sections and ”. This indicates that Section 236 has a close correlation with Sections 236 and 236, and does not confer any separate statutory ‘put option’ right to the minority shareholder, that is independent of any Shareholders’ Agreement executed between the parties.

As the fundraising constitutes an issue for “non-cash” consideration, the statutory pre-emption rights under CA 2006 do not apply which means that a company which only has authority to issue 5% on a non-preemptive offer can potentially upsize the placing. These structures involve the listed company issuing shares to new institutional investors as consideration for the shares in an offshore special purpose vehicle that has received cash paid by the new investors.

• Before accepting such a loan signed declaration that the money given is not out of the borrowed funds must be obtained from the Director or his relative.
• This structure can sometimes involve a cornerstone investor receiving an element of firm placed shares on a non-preemptive basis (i.e. shares that are not subject “clawback”), but this would only be possible if the shareholder authorities are sufficient.
• The Board members of both the companies decided to convert the said loan into equity shares of the company .
• The fundraising announced by SSP Group plc on 25 March 2020 has been structured as a cashbox placing.
• If structured correctly, cashbox placings can also be used to create distributable reserves using the merger relief provisions under the CA 2006.
• If the company is nearing insolvency, the interests of creditors become paramount, rather than those of shareholders.
• Along with Section 235, the Act has also added Section 236, which is a new provision dealing with “purchase of minority shareholding”.

Where the court held that Courts are not to act upon principal that every procedure is to be taken as prohibited unless it is expressly provided for by the Code, but on the converse principal that every procedure is to be understood as permissible till it is shown to be prohibited by the law. Director of a company is the manager and head of the company after the chairperson…. Filing e-form MGT-14 within 30 days of the passing of Special Resolution with ROC.

Form Foreign Currency-Gross Provisional Return (FC-GPR) has to be filed with the Reserve Bank of India within thirty days from the date of issue of equity instruments of a company to a person resident outside India. These shares should be fully called up within 12 months or as specified by the Reserve Bank of India.

Concept Of Conversion Of Loan Into Equity Share Capital As Per Companies Act, 2013

Keeping in mind the recommendations made in the Irani Committee Report, the wording of Section 236 could have expressly stated that the minority shareholders have a corresponding obligation to sell their shares to the majority at fair value, once the conditions prescribed under Section 236 are satisfied. The wording of the provision and the legislative objective suggests that Section 236 is closely connected with the preceding provisions, and the minority shareholder can make a binding offer to sell his shares only when the pre-conditions prescribed https://accountingcoaching.online/ under Sections 236 and 236 are satisfied. In OBO Bettermann, the majority shareholders (who held 99.64% of the shareholding of the company) tried to compulsorily acquire the shares of the minority, by issuing notices under Section 236. In comparison, company laws of most developed countries provide a clear right to the majority shareholders with suitable safeguards, like Sections 979 and 983 of the English Companies Act, 2006. Indian Company Law is largely based on English Company Law, but we have departed from them in this one vital aspect.

These shares can only be converted to equity shares on the happening of certain events in the company related to shares. Compulsorily Convertible Preference Shares have to be converted into equity shares. Non Cumulative Preference Shares- There is no form of arrears for the payment of dividends for non-cumulative preference shares. Companies can offer cumulative preference shares and non-cumulative preference shares to the shareholders.

Annual Compliance For Accepting A Loan From Director Or Relative Of The Director

For detailed provisions for related party transactions under Companies Act, 2013, refer to sections 2, 177 and 188 of the Companies Act, 2013. SR shares have been held for a period of at least 6 months prior to the filing of Red Herring Prospectus . An FC is defined “on the basis of its significant presence in two or more market segments out of 5 segments (namely, Banking, Insurance, Capital Market, Non-Banking Finance and Pension Fund)”. Based on the criteria for identifying financial conglomerates, certain groups have been identified as FCs in India with different regulators acting as the Principal regulators for different FCs depending on the major segments of business. Contravention of SEBI Regulations, circulars, etc. may invite freezing of shareholding of promoters/promoter group entities. A certain minimum contribution required from promoters in case of a public issue and lock-in provision on such contribution to ensure ‘skin-in-the-game’. Your login credentials do not authorize you to access this content in the selected format.

Detailed disclosure obligations on the promoters with respect to changes in their shareholding, change in control, etc., especially keeping in mind requirements under SEBI’s Takeover and the Prohibition of Insider Trading Regulations. Listed entity to disclose separate audited financial statements of each subsidiary on its website in respect of a relevant financial year, uploaded at least 21 days prior to the date of the annual general meeting which has been called to inter-alia consider accounts of that financial year. An independent director on the board of the listed entity to be appointed on the board of material unlisted subsidiaries (Specifically for this provision, the threshold for material subsidiary is considered as 20%). Stricter norms for related party transactions vis-à-vis the requirements under Companies Act, 2013 such as related parties not being permitted to vote to approve when material transactions are put to vote to shareholders, increased disclosures etc. Employee Stock Options may be provided to the directors, officers or employees of a company’s holding company or its subsidiary17. Several countries have cross-shareholdings as a major form of group structure. However, in India, the pyramid structure, mainly revolving around holding company-subsidiary relationships, is the most common construct of company group structures as can be seen from the data above.

Share Capital On A Balance Sheet

Thus, issue of shares for non-cash consideration is in a way conversion itself by way of extinguishment of liability. This agreement should contain the terms of converting loans into the equity share capital of the company. Equity is money invested in a company by the owners who are called shareholders. The shareholder receives voting rights and he/she can vote in annual meetings which concern the management of the company for the future.

However, after the commencement of the Companies Act, 2013, now a company cannot issue perpetual or irredeemable debentures. The investor has the option to either convert these debentures into shares at a price decided by the issuer/agreed upon at the time of issue. Authorized share capital is the maximum amount a company has been approved to raise in a public offering. 8.5 The buy-back must be completed within 1year from the date of passing of a special resolution at the general meeting or a board resolution. By purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity. 1.2 The Securities and Exchange Board of India (Buy-back of Securities) Regulations, 1998(“SEBI Buy-back Regulations”) apply to buy-back of shares or other specified securities of a company listed on a stock exchange. Buy-back is not permitted for the purpose of delisting of a company’s shares or other specified securities from the stock exchange.

Therefore, in case of group structures, which constitute only unlisted companies, the provisions of the Companies Act, 2013 will apply to all such companies in the group. However, if any of the entities in the group is a listed entity, additional requirements are laid down in SEBI Regulations with respect to such structures with a view to protect the interest of the public investors. Hence Compulsorily Convertible preference shares can be issued by an Indian company to the foreign investor under the FDI route. These preference shares must be treated as equity shares for overseas direct investment. As per the governing norms of the Department of External Affairs, Government of India and the Ministry of Finance, preference shares must be treated as ordinary shares. For the respective FDI sector caps, these shares should be treated as equity shares if they are fully convertible.

A Gap Analysis Of The Companies Act 2012

Hence, related party transactions are a normal feature of business in company groups and often have a significant impact on the financial position of the company/group. Notwithstanding these advantages, such transactions also have a significant potential for abuse in view of conflict of interest involved.

Premium listed companies are required to produce a prospectus if they wish to issue more than 20% of their existing share capital on a rolling 12 month look back basis. Additional triggers may also apply in other situations (e.g. if the fundraising involves “an offer to the public”). Such holding-subsidiary relationships are often prevalent because of various advantages that such structures may offer to the companies/group.

That being so, directors may, under specific circumstances, still be liable in person for acts that are performed ultra vires. Under the automatic route, Indian companies which are eligible to raise ECBs, can raise up to USD 750 million or equivalent per financial year. Further, Indian companies raising monies above USD 750 million or equivalent would prior approval of Reserve Bank of India is required before loan can be availed. Under Indian foreign exchange laws, a company can raise loans and borrowings from person resident outside India in the form of external commercial borrowings (“ECBs”) as per the Master Direction – External Commercial Borrowings, Trade Credits and Structured Obligations.

It refers tothe debentures which are issued with a condition that the debentures will be redeemed at a fixed date or upon demand, or after notice, or under a system of periodical drawings. Debentures are generally redeemable and on redemption these can be reissued or cancelled. These instruments are secured by a charge on the fixed assets of the issuer company. So if the issuer fails on payment of either the principal or interest amount, such fixed assets can be sold to repay the liability to the investors. Return the share certificates to the shareholders or security holders whose securities have not been accepted at all or the balance of securities in case of part acceptance. For security purposes, and to ensure that the public service remains available to users, this government computer system employs programs to monitor network traffic to identify unauthorized attempts to upload or change information or to otherwise cause damage, including attempts to deny service to users.

Therefore, SEBI has been continuously focusing its efforts to build robust disclosure practices by trying to have a dynamic approach to regulation. The Ministry of Corporate Affairs has also, on its part, made a giant stride with the new Companies Act, 2013. These efforts have contributed to India being ranked 7th in the world on the parameter ‘Protecting Minority Investors’33as per the latest rankings of World Bank with respect to ‘Ease of Doing Business’. The importance of addressing systemic risk and supervising Financial Conglomerates came to the forefront subsequent to the 2008 global financial crisis. Monitoring of Financial Conglomerates got a renewed focus in India with the establishment of the sub-group of Inter Regulatory Forum, under the aegis of FSDC Sub Committee. Financial conglomerate supervision involves assessment of systemic risk posed by a FC group; the focus here being inter-connectedness of group entities and inter-linkages in the financial system. Restrictions on sale/disposal/leasing of material assets of a material subsidiary.

Types Of Shares

Disclosure of all events or information with respect to a subsidiary, which are material for the listed entity. In this regard, sale or disposal of any subsidiary of the listed entity is deemed to be a material event, requiring disclosure to the stock exchanges.

As on 31st March 2019, Company has 3,60,59,649 “Series A” Equity shares of Rs. 10 Each. 52,48,614 ‘Series A’ (14.55 %) Equity Shares of Rs. 10/- each would be converted in to 52,48,614 9% fully paid-up Non-Cumulative Optionally Convertible Redeemable Preference Shares of the face value of Rs.10/- each. In exchange it expects the Indian company to allot shares and the resultant IPR in the Indian company would be owned jointly by both companies .

Tax Tribunal Decision

Hence, we understand that there is no such requirement to get the terms of issue approved by the members before entering into a transaction of purchase of goods or services, unlike in case of conversion of loan or debentures. If any company accepted loan before 1st April and wants to convert loan into Equity shares at present company then Company can’t convert such loan into shares according to section-62 of Companies Act, 2013 except if company passed the special resolution at the time of acceptance of loan. Therefore, debt conversion to equity is a common transaction in the financial world.

Hr Law Hotline

This is also supported by Section 236 of the Act, which provides that when a majority equity shareholder “fails to acquire full purchase of the shares of the minority equity shareholders”, then Section 236 shall continue to apply to the residual minority equity shareholders. While Sections 236 and 236 [which deal with the majority shareholders’ right to buyout the minority], use the word “shall”, Section 236 uses the word “may”.

If a loan is converted into Compulsorily Convertible Preference shares, it must be reported to the RBI. Optionally convertible/ partially convertible debentures are issued up to 07 June 2007, which have a maturity period as applicable. The RBI provides master guidelines to Authorised dealers to deal with foreign exchange transactions within the country. Authorized Dealers (Category-I)/ Authorised Persons act on behalf of companies and businesses to conduct foreign exchange transactions. The Government of India has brought out the Foreign Exchange Management regulations.

Accepting A Loan From A Director Who Is Also A Shareholder Of The Company

Companies are expected to have a majority of independent non-executive directors and an independent Chairman. These are not legally binding requirements, although deviations do need to be justified and might need to be phased out when the immediate crisis which justified deviation has passed.

In the case of private limited companies, it is obvious that the person from whom the company is accepting loan is Director and shareholder as well. Therefore, identifying & determining the capacity (i.e. as Director or shareholder) in which the loan is given, plays a very crucial role. Hence, a loan accepted by a private limited company from its directors Loan Conversion into Equity Share Capital under Companies Act, 2013 or their relatives is allowed and is considered as an exempt category deposit. If we look at the facts of our entrepreneur, they never had an intention to convert the said loan into equity at the time of borrowing the money, however the situation has lead the management of both the companies to arrive at this decision to convert the loan to shares.