1 The Companies Act

2 Overview  Acceptance of Deposits by Companies  Related Party Transaction  Private Placement & Share Application  Loan to Director  Loan & Investment

3 DEPOSIT

4 Acceptance of Deposits by Companies (Section- 73) Companies shall not invite, accept or renew deposits from the public except in the manner provided in this section. (Section 73(1)) Section not applicable on  Banking companies,  Non banking financial company  Housing Finance Comnpany  Other company as central company may specify. Private Companies are now prohibited to accept Deposits only from Public- can accept deposit from members

5 Conditions for Acceptance of Deposit Deposits can be accepted from Members subject to following conditions: 1. Issuance of Circulars mentioning:  Company’s financial position,  Credit Rating,  Total no. of Depositors,  Amount due towards previous deposits. 2.File a copy of circular within 30 days before the date of issuance of circular. Continued....

6 Conditions for Acceptance of Deposit 3.Deposit with Scheduled Bank in Deposit Repayment Reserve A/C, not less than 15% of deposit maturing in current and next FY. (This account shall be used only for repayment of deposits.) 4.Deposit insurance mandatory. 5.No default in repayment of deposit and interest thereon in the past.  Whether Continuing Default? 6.Deposits to be secured by Property or Assets of the company. Cont....

7 7.Unsecured or partially secured deposits to be disclosed in every circular, advertisement, etc. related to deposits. 8.Deposit to be repaid as per agreed terms and conditions. 9.No Demand Deposits and Rate of interest cap same as NBFC 10.Period of deposit 6 month to 36 month 11.Short term requirement max upto 10% of Paid Up – 3 months 12.Private Company can accept or renew deposits upto 25% of paid up capital plus reserves 13. Public Eligible company can accept upto 10% from Members and upto 25% of Paid up capital and reserves from Others.

8 Conditions for Acceptance of Deposit Even Private company to issue circular to all its members and Advertisement in 2 newspapers? Eligible Public company to issue circular to all its members and Advertisement in 2 newspapers plus website hoisting Mandatory deposit insurance of at least Rs. 20K per depositor Creation of full security on tangible assets except for members Short term requirement max upto 10% of Paid Up – 3 months Failure to repay deposit: Depositor may apply to the Tribunal for repayment of Deposits or for any loss/ damages incurred.

9 Repayment Of Existing Deposits sec.74 File a statement with Registrar within 3 months from the commencement of all existing deposits. Deposit Which were Deposits within the meaning of Deposit before commencement of the new Act. Repay within 1 year or balance term as per terms agreed Penalty:  Unpaid deposit and thereon, together with :  Company- Fine of not less than 1 crore and not exceeding 10 crores;  Officer in default- Imprisonment extending to 7 years or fine not less than 25 lakhs but not exceeding 2 crores, or both.

10 Acceptance of Deposits from Public by certain Companies (Section 76 )  Eligible Companies - Public Companies having:  Net worth not less than 100 crores, or  Turnover not less than 500 crores.  Credit Rating Mandatory.  Fully Secured.

11 Deposits Rules  Deposit Rules does not apply to:  Banks  NBFC  Housing Finance Companies  Deposits defined as per Section 2(31) of the Act: “Deposits” includes any receipt of money by way of deposits or loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the RBI.  Principle of Ejusdem Generis – Any other form has to be interpreted as in the nature of loans/ deposits.

12 Deposits does not include: 1.Money received from Commercial Paper and Inter Corporate Deposits State or Central Government Foreign Government Bank Public Financial Institutions 2. Amount received pursuant to an offer for subscription: To any securities Share Application money, or Advance towards allotment of securities pending allotment Continued…..

13 Deposit does not include Continued... 3.Provided amount mentioned in point 2 above i.e subscription money shall be used for: Allotment within 60 days, or Refund within 15 days from the expiry of 60 days Adjustments for any other purpose not permitted. 4.Amount received from Directors own sources. 5.Fully Secured Debentures/Bonds by first charge or pari passu charge on the asset of the company not exceeding the market value Exceptions: Intangible assets Compulsorily convertible bonds / debentures within five years. Continued…..

14 Deposit does not include Continued… 6.Employee security deposit ( maximum salary of 1 year) 7.Non interest bearing amount received or held in trust PANDORA BOX 8.Amount received for the business of the company: a) Amount received from customers if adjusted within 365 days Exception:  Time limit of 365 days not to be applied on Advance received under litigation.  Amount received not repaid within 15 days from the due date considered deposits. Continued…..

15 Deposit does not include Continued… b)Advance against Property as per the terms of agreement. c)Security Deposit for goods or services d)Advance received under Long term project for supply of Capital Goods. For the points a, b and d company should have permission to deal in goods or services or property, otherwise considered as deposits. 9.Unsecured Loans from promoters or their relatives as per the stipulation imposed by Bank/ FI. 10.Nidhi Companies deposit subject to conditions. Continued…..

16 Resolution Required Eligible Companies- Public Companies having: Net worth not less than 100 crores, or Turnover not less than 500 crores, and Prior approval by way of Special Resolution in general meeting. Failure to repay can also attract Fraud penalty under sec.447 Exception: Ordinary Resolution in case deposits are within the overall limit of Net Worth Sec 180(1)(c)  Section 73 (2) requires only an Ordinary Resolution

17 RELATED PARTY TRANSACTION

18 Related Party Transaction (section 188) Related party (definition) [section 2(76)] The following are included:  Director  Relative of director  Key managerial personnel(KMP)  Relative of key managerial personnel  Director or KMP of holding company or their relatives(Rule 3)  Firm, in which a director, manager or his relative is a partner;  Private company in which a director or manager is a member or director; Continued...

19 Continued…  Public company in which a director or manager is a director along with his relatives holds, two per cent or more of its paid- up share capital;  Any person on whose advice, directions or instructions a board of director or MD or manager is accustomed to act, except in professional capacity.

20 Contract of employment with Managing or Whole-time directors (Section 190) Exemption to private companies  Every company shall keep at its registered office,—  where a contract of service with a managing or whole-time director is in writing, a copy of the contract; or  where such a contract is not in writing, a written memorandum setting out its terms.  The copies shall be open to inspection by any member.  Besides the above changes, penalty for contravention increased from Rs. 10,000 (under the 1956 Act) to Rs. 25,000.

21 Payment of Compensation for loss of office or place of profit (Section 191, Rule 17 of Board Rules) To be approved by general meeting with full disclosure Contract voidable unless compensation by any other person or transaction is bona fide for value without notice of contravention

22 Payment of Compensation for loss of office or place of profit (Section 191, Rule 17 of Board Rules) Regulate arrangement for acquisition of asset for consideration other than cash by/ from Company. i.Director of Company ii.Director of Holding or subsidiary or associate. iii.Person connected with such Directors.  Prior approval of shareholders of the company in General meeting  Prior approval of shareholder of Holding Company if Director concerned is Director in Holding Company. Notice to include full details prescribed.

23 Prohibition on forward dealing Section 194 Whole time Director and KMP prohibited to buy future, forward and option contracts in shares/debentures of Company Holding Company Subsidiary Company Associate Company Punishment: Imprisonment up to 2 years or Fine Rs.1 Lakh to Rs. 5 Lakh or Both. The Company shall not register such securities bought by WTD/KMP and continue in name of Transferee.

24 Prohibition on Insider Trading of Securities (Section 195) New provision Directors or KMP and other person of Company prohibited to the Insider Trading Exemption: Communication in the ordinary course of business, profession or employment. “Insider trading” and “Price sensitive Information” defined Punishment:  Imprisonment up to 5 years or  Fine Rs. 5 lakhs to Rs. 25 crores or 3 times of profit made, whichever is higher or Both.

25 PRIVATE PLACEMENT & SHARE APPLICATION

26 Public Offer and Private Placement (Section 23) Public offer- Prospectus Offer for sale-prospectus Private placement Right or bonus issue Private company cannot make public offer/offer for sale

27 Private Placement (Section 42) Applicable to a public company as well as a private company Private placement offer letter Special resolution for each offer or invitation except in case of NCDs special resolution can be once a year Maximum offer to 200 persons for each kind of security, equity, preference shares, debentures In a financial year, excluding QIB and ESOP These limits do not apply to NBFC/ HFC Minimum investment of Rs. 20,000 face value These limits do not apply to NBFC/ HFC Continued ….

28 Continued.... Payment from subscribers self bank account only Cash payment prohibited No fresh offer, unless allotment of earlier offer completed or withdrawn or abandoned Allotment within 60 days from the date of receipt of application money Un-allotted money to refund within 15 days from expiry of 60 days Failure to refund interest to pay at 12 % p.a. from 61st day Money to be kept in a separate bank account in a scheduled bank - Used for allotment Used for refund No other usage Continued ….

29 Continued.... Private placement to be specific to only intended person by name Details of private placement offer to file with registrar within 30 days No public advertisement or media, marketing or distribution channel or agent PENALTY Non compliance penalty on the : Company Promoters Directors Of Rs. 2 Cr. Or amount of private placement, whichever is higher

30 Further Issue of Capital Old Section 81, 94D New Section 62 Apply to Public Companies as well as Private Companies  Right issue in preparation to existing shares  Offer letter to send to all shareholder giving 15 to 30 days notice  Non acceptance amount to denial  Right to renounce in built in the offer for right share  Non-acceptance of right offer- the company can dispose of shares in any manner not disadvantageous to shareholder or company  ESOP : Special Resolution to authorise

31 Loan to Director

32  SAVE AS OTHERWISE PROVIDED IN THE ACT  No Company shall directly or indirectly, Advance any loan (including loan represented by book debt) Gives any guarantee or provide any security in connection with a loan to:  Any Director  Any other person in which Director is interested which means i. Director of lending Company or of a holding company ii. Partner of director iii. Relative of director Loan to Directors (Section 185) Continued ….

33 iv.Firm in which such director is a director or relative is a partner v.Any private company in which director is a director or a shareholder vi.Body corporate where 25% or more voting power is held by one or more director vii.Body corporate, Board of director, managing director, or manager accustomed to act as per instruction of lender or one or more director Continued ….

34 Contravention Punishment: a.Minimum Rs. 5lakh to Rs. 25 lakhs on lending company b. Director or other person to whom loan advanced/ security provided : I. Imprisonment upto 6 months or II.Fine of minimum Rs. 5 lakhs to Rs. 25 lakhs Continued ….

35  Loan by Holding company to/ for : Wholly owned subsidiary exempted from section 185  Guarantee/ security to others for loan by other than bank/ FI exempted only for wholly owned subsidiary.  Section 185 do not authorise rule making. This rule is in general powers of exemption under section 462.  Guarantee given or security provided by holding company for : Loan by bank or FI to any subsidiary company exempted Rule 10 of Board Rules

36 Loan & Investment

37 (Section 372 A as per CA 1956 Section 186 as per CA, 2013) 1.Company shall make investment through not more than :  Two layers of  Investment Company Except: Outside India as per local laws. To meet requirement of law or regulation or rules under law. Continued..... Loan and investment by company (Section 186)

38 2.No company shall directly or indirectly:  Give any loan, guarantee/ provide security for loan to any: Any person, or Body Corporate  Acquire securities of any other Body Corporate  exceeding 60% of Paid up Capital plus free reserves plus security premium or  100% of free reserves plus securities premium, whichever is more. Continued..... Continued....

39 3.Loan or investment in excess of limits.  Special Resolution by shareholders.  Unanimous consent of all the directors present in a meeting.  No resolution by circulation  Whether general consent or authorisation will work similar to erstwhile section 293 old New section Prior approval of public financial institution where loan subsisting for exceeding limit as per Section 186(2) or where is a default.  Word “Bank” or “Lender” is not there in the Law. Continued..... Continued....

40 5.Loan at minimum interest rate equal to yield Government security as per tenor (1/3/5/10 years). 6.Defaulter of Deposit or interest thereon prohibited to give Loan or guarantee. 7.Register of loans, guarantees, Securities. 8.Financial statements to contain full particulars a.Loan given b.Interest made c.Guarantee given d.Security provided Continued..... Continued....

41 EXCEPTIONS : Section 186 do not apply to  Banking Company  Insurance Company  Housing finance  Company engaged in the Business of financing  Company providing infrastructural facilities.  NBFC whose principal business is security acquisition Exemption from lending and investment both.  Company whose main business is acquisition of securities.  Share investment in Right issue of investee company(under section 62(ii)  Now all further issue of equity has to be right issue Section 62. Continued....

42 Exemption (Rule 11 Board rules) Resolution under Section 186(3) not needed if: Loan or Guarantee or Security to Wholly Owned Subsidiary or Joint Venture Company  Joint Venture Company not defined  Gateway to exempted loans to all company whose shares are owned under a JV agreement Investment in Wholly Owned Subsidiary

43 Special resolution (Rule 13 Board rules) Special resolution required under section 186(3)  As per section only word special resolution is specified.  As per rule 13(1) prior approval by special resolution prescribed. Existing loan and investment : Special resolution to be passed within 1 year from notification of section 186. Rule 13(2) permits general authority by special resolution to Board to specify upper limit of total amount of loan, investment, guarantee and/or security in relation to Loan.  Board approval will still be a must on unanimous

44 VINOD KUMAR & ASSOCIATES CHARTERED ACCOUNTANTS NEW DELHI 909 Chiranjiv Tower 43 Nehru Place New Delhi – Brij Bhawan 21A Ansari Road Darya Ganj New Delhi GURGAON Global Business Square Building No. 32, Sector 44 Institutional Area, Gurgaon, Haryana – Disclaimer: While every care has been taken to ensure accuracy of this presentation, Vinod Kumar & Associates shall not assume any liability/ responsibility for any errors that might creep in. The material herein does not constitute/ substitute professional advice that may be required before acting on any matter.