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Corporate Law Brief-July-September 2021

As we close the second quarter of financial year 2021-22, let’s have a look at the developments that took place in the last three months. The Ministry of Corporate Affairs (MCA) vide a notification dated July 22, 2021, has appointed September 1, 2021, as the date to bring into effect the amendment to Section 4 of the Companies Act, 2013. The said Amendment is a part of the Companies (Amendment) Act, 2020 and provides that if a company fails to…

As we close the second quarter of financial year 2021-22, let’s have a look at the developments that took place in the last three months.

The Ministry of Corporate Affairs (MCA) vide a notification dated July 22, 2021, has appointed September 1, 2021, as the date to bring into effect the amendment to Section 4 of the Companies Act, 2013. The said Amendment is a part of the Companies (Amendment) Act, 2020 and provides that if a company fails to comply with the direction of Central Government to change its name, the Central Government shall allot a new name to the Company.

In continuation of its General Circular No. 10/2020 dated March 23, 2020, the MCA vide a notification dated July 30, 2021, has clarified that spending CSR funds for COVID-19 vaccination for people other than employees and their families is an eligible CSR activity under item no. 1 of Schedule VII of the Companies Act 2013 relating to promotion of health care, including preventing health care, and item no. (xii) of Schedule VII of the Companies Act, 2013.

The Reserve Bank of India (RBI) vide a notification dated July 23, 2021 has made the following amendments to the Master Circular – Loans and Advances – Statutory and Other Restrictions dated July 01, 2015:

  • Threshold limit for granting personal loans to directors of other banks is increased to Rs. 5,00,00,000 from  existing Rs. 25 Lacs.
  • Threshold limit for granting loans and advances to permissible relatives (as mentioned in the circular) increased to Rs. 5 crores from existing Rs. 25 Lacs.
  • Additional requirement which states that a relative of a director will be deemed to be interested in a holding or subsidiary company, if the person is a major shareholder/in control of the respective subsidiary/holding company.

Proposals for credit facilities of a sum less than Rs. 25 Lacs to the “permissible relatives” can be sanctioned by the appropriate authority in the financing bank, but the matter should be reported to the Board.

The Security and Exchange Board of India (SEBI) vide a circular dated July 5, 2021 has altered the Circular No. CIR/OIAE/1/2009 which had laid down the guidelines for obtaining NOC for release of 1% of issue amount. SEBI has now decided to reduce the time period for the issuer company to submit an application addressed to SEBI after lapse from 4 months to 2 months.

SEBI  has  prescribed  that  on  or  after  October  01,  2021  investors  opening  new trading  and  or  demat  accounts,  will  have  the  choice  of  providing  nomination  or  opting  out nomination. Depository Participants can activate new trading and demat accounts only upon receipt of:

  • Nomination form, in the format prescribed in Annexure A of the Circular.
  • Declaration Form for opting out of nomination in the format prescribed in Annexure B of the Circular.
  • All existing eligible trading and demat account holders must provide a choice of nomination on or before March 31, 2022, failing which the trading and demat account shall be frozen for debit transactions.

International Financial Services Centres Authority (Banking) (Second Amendment) Regulations, 2021 has been notified on July 6, 2021 which seeks to amend the following:
“IFSC Banking Unit” or “Banking Unit” has been defined as a financial institution that  is  licensed  by  the  Authority  to undertake permissible activities under these regulations;
“Home Regulator” has been defined as the regulatory authority that is responsible for regulating  the  Parent  Bank  in  the  jurisdiction  where  the  Parent  Bank  is  incorporated, licensed or established;
The Capital Contribution requirement by Parent Bank for grant of license has been amended. The Parent bank, now, shall provide necessary capital for the BU, subject to a minimum of USD 20 million or such other level of capital that may be specified by the Authority. Such capital shall be maintained at the Parent Bank in the manner as specified by the Authority;
Banking Unit shall adhere to the norms and guidelines relating to exposure ceiling as may be specified by the Authority, from time to time;
The liabilities of a Banking Unit, other than the deposits raised from individuals resident in  India  or  outside  India,  shall be  exempt  from  Cash  Reserve  Ratio  or  other  such  requirements. The deposits raised from individuals resident in India or outside India shall  be subject to such reserve ratios as may be specified by the Authority; and
Amendments have also been made in Regulation 11 regarding foreign currency accounts and Regulation 13 regarding permissible activity; and among other changes.

In yet another step to enhance International Financial Services Centre(IFSC) activity through  a Circular dated August 25, 2021, IFSCA has allowed Indian banks and other Indian financial institutions operating in the IFSC to provide financial products denominated in Indian rupees, subject to the IFSCA’s instructions. This decision is based on RBI’s recent clarification of the Master Direction – Direct Investment by Residents in Joint Ventures (JVs) / Wholly Owned Subsidiaries (WOS) Abroad dated January 1, 2016 (ODI Master Direction), which prohibits an overseas entity with direct or indirect equity participation by an Indian Party from offering financial products linked to the JV or WOS. The RBI stated that the phrase “overseas entity” used in the aforementioned paragraph does not include branches of Indian banks and other Indian financial institutions operating in the IFSC.

To amplify foreign investments, the MoF has made changes to the Foreign Exchange Management (Non-debt Instruments) Rule, 2019 to increase the sectoral cap of FDI for insurance companies to 74% under automatic route,from the earlier limit of 49%.

SEBI, vide the new Securities and Exchange board of India (Share based Employee Benefits and Sweat Equity) Regulations, 2021 has implemented the following key changes with respect to the share based employee benefits and sweat equity benefits:

Companies are allowed to provide share-based employee benefits to employees, who are exclusively working for such company (whether in India or outside India) or any of its group companies including its subsidiary or its associate or of a holding company of the company.
No minimum vesting period in case of death/permanent incapacity. The company implementing employee benefit schemes are required to frame an appropriate policy with respect to the death or permanent incapacity of an employee, subject to compliance with applicable laws.
The unappropriated inventory of shares which are not backed by grants, acquired through secondary acquisition by the trust to be appropriated within a reasonable period which shall not extend beyond the end of the subsequent financial year, or the second subsequent financial year subject to approval of the compensation committee/nomination and remuneration committee for such extension to the second subsequent financial year.
Maximum yearly limit of sweat equity shares that can be issued by a company listed on the main board shall  be 15% of the existing paid-up equity share capital within the overall limit not exceeding 25% of the paid-up capital at any time.
In case of companies listed on the Innovators Growth Platform (IGP), the maximum yearly limit shall be 15% and overall limit shall be 50% of the paid-up capital at any time. This enhanced overall limit for IGP shall be applicable for 10 years from the date of company’s incorporation.

SEBI had implemented the System Driven Disclosures(SDD) in phases under SEBI Circular dated September 9, 2020 (SDD Circular) and required that such system would run parallel with the existing system i.e. the entities shall continue to independently comply with the disclosure obligations under SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations) as applicable to them till March 31, 2021. Since the SDD has gone live on April 1, 2021, SEBI has now clarified that for all such listed companies that have complied with requirements of the SDD, the manual filing of disclosures as required under Regulation 7(2) (a)&(b) of PIT Regulations is no longer mandatory. This relaxation has been introduced vide SEBI circular dated August 13, 2021.

SEBI has issued a Circular (SEBI/HO/IMD/IMD-II DOF3/P/CIR/2021/631) to bring in the swing pricing framework for mutual fund schemes. To begin with, the swing pricing framework will only be relevant to circumstances involving net outflows from the schemes under the framework. The Framework shall be a hybrid with:
i.    A partial swing during normal times; and
ii.   A mandatory full swing during market dislocation times for high risk open ended debt schemes.
The Framework shall come into effect from March 1, 2022.

SEBI vide Circular SEBI/HO/IMD/IMD-1 DOF2/P/CIR/2021/630 has also updated the Risk Management Framework (RMF) for Mutual Funds. This framework provides mandatory elements which should be implemented by the Asset Management Companies (AMCs), and recommendatory elements which should be considered for implementation by the AMCs. The Circular mandates self-assessment of RMF by the AMCs and submission of a report on the same to their Board along with a roadmap for implementation of the framework.

RBI has issued Master Directions on “Transfer of Loan Exposures” and “Securitisation of Standard Assets” on September 24, 2020. Transfer of Loan Exposures Master Directions provide applicable guidelines for  all loan transfers including sale of loans through novation or assignment, and loan participation, undertaken by the financial institutions, including NBFCs and housing finance companies.

Master Direction on Securitisation of Standard Assets, inter alia, specify Minimum Retention Requirement (MRR) for different asset classes. For underlying loans with original maturity of 24 months or less, the MRR will be 5% of the book value of the loans being securitised. For the loans with original maturity of more than 24 months as well as loans with bullet repayments, the MRR shall be 10% of the book value of the loans being securitised. The minimum ticket size for issuance of securitisation notes shall be INR One Crore.

From the Docket

In the case of Polytech Trade Foundation v. Union of India & Ors., the Delhi High Court, while dismissing the petitions addressed whether the Container Freight Station, Ministry of Shipping, Directorate General of Shipping and Central Board of Indirect Taxes and Customs  have powers under the Disaster Management Act, Merchant Shipping Act, Major Port Trust Act or the Customs Act to interfere in contractual matters and direct one part to not charge/levy charges that it is entitled to charge under a contract. Answering the question in negative, the Court held that the jurisdiction of the same is not included in these Acts.

In the Union of India v. Association of Unified Telecom Service Providers India, the Supreme Court directed the government not to encash bank guarantees of Bharti Airtel Ltd. for three weeks over the payment of adjusted gross revenue dues to allow the company to approach a telecom appeals tribunal.

In the matter of AGIJ Promotion of Nineteenonea Media Pvt. Ltd. v. Union of India & Anr., the High Court of Bombay, in the ongoing proceedings,  stayed two clauses of Rule 9 of the Information Technology (Guidelines for Intermediaries and Digital Media Ethics Code) Rules, 2021, citing “indeterminate and wide terms” as prima facie violating the Constitution’s right to freedom of speech and going beyond the substantive law of the Information Technology Act, 2000.

In the case Neotech Engineers Pvt. Ltd. v. Registrar of Companies, Uttar Pradesh, the National Company Law Tribunal Allahabad (NCLT) held that failure to furnish annual returns is not a justifiable ground for striking off the name from the Registrar of Companies.

In Prakash Gupta v. Securities and Exchange Board of India, the Supreme Court of India interpreted Section 24A of the Securities and Exchange Board of India Act (SEBI Act) for the first time holding that an offence under the SEBI Act can be compounded only under the SEBI Act and not as per Section 320 of the Code of Criminal Procedure, 1973.

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