Recent Changes in Company Law By Mahavir Lunawat Outline

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Recent Changes in Company Law

• By Mahavir Lunawat

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Outline

• History Sequence of Milestone Events
• Developments since 2005 till date
• Amendments
• Significant Judicial Pronouncements
• Proposed Law

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Sequence of Milestone Events

• Scams in US
• US Sarbanes Oxley Act, 2002
• SEC Rules under SoX
• Naresh Chandra Committee on Corporate Governance
• Companies Amendment Bill, 2003
• Concept Paper on Company Law
• White Paper on Modern Company Law, UK
• Company Law Reform Bill, UK
• J J Irani Committee
• Concept Paper on LLP Law

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Amendments
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SEBI Law

• Implementation of revised Clause 49
• Independent Directors
• Subsidiary Monitoring
• Shareholders Prior approval for compensation /
  stock options to NEDs
• Audit Committee Eligibility Criteria, mandatory
  review etc.
• Statutory Compliance Review
• Risk Management Procedure
• Code of Conduct for Directors Senior Management
• CEO and CFO Certification
• Non-Mandatory Term of Independent Director,
  Whistle Blower Policy etc.

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SEBI Law

• SEBI (DIP) Guidelines, 2000 - Book Building Norms
  
• Enhancing allocation category for RIIs
• In case of book built issues with mandatory
  allocation of 60 to QIBs under Rule 19(2)(b),
  the respective figures shall be 30 for RIIs and
  10 for NIIs.
• Redefining Retail Individual Investors RIIs
  can apply for shares up to a maximum amount of
  Rs.1,00,000/- as against the extant limit of
  Rs.50,000/-
• Reducing the bidding period The bidding period
  has been reduced from current 5 10 days
  (including holidays) to 3 -7 working days
• Timing of disclosure of Price Band / Floor Price
  in case of listed companies Listed issuers
  making a follow-on public issue may disclose the
  price band /floor price atleast one day before
  bid opening
• SEBI/CFD/DIL/DIP/15/20, dated March 29, 2005

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SEBI Law

• SEBI (DIP) Guidelines, 2000 - Book Building Norms
  
• Changes re. QIB allotment
• Out of the existing 50 portion available for
  QIBs, 5 will be specifically available for
  Mutual Funds registered with SEBI. However, the
  Mutual Funds will also be eligible for allotment
  in the remaining 45 portion
• QIBs will bring at least 10 margin (calculated
  on application money) while submitting the bids
• The allotment of shares to QIBs will be on
  proportionate basis

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SEBI Law

• SEBI Press Release (no. 108/2005 dated August 26,
  2005) on Minimum Public Shareholding
• All listed companies to maintain atleast 25
  shareholding with public for continuous listing.
  However, companies permitted to make an IPO of
  atleast 10 to public under Rule 19(2)(b) to
  maintain min. 10 only
• Listed companies, not complying with the min.
  public holding requirement to be given a period
  of 2 years for compliance
• Government companies, infrastructure companies
  and companies registered with BIFR to be exempted

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SEBI Law

• Review of Demat Charges
• Effective 9-1-2006, no charges will be levied by
  a depository on a DP and by a DP on a Beneficiary
  Owner (BO) when a BO transfers his account to
  another branch of the same DP or to another DP of
  the same depository or another depository.
  MRD/DoP/Dep/Cir-22/05 dated 9-11-2005
• SEBI vide Circular MRD/DoP/SE/Dep/Cir-4/2005
  dated January 28, 2005, had already waived the
  following charges effective February 1, 2005
• charge towards opening of a BO Account except for
  applicable statutory charges
• charge for credit of securities into BO Account
• custody charge

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SEBI Law

• Guidelines for Execution of Block Deals on the
  Stock Exchanges Circular MRD/DoP/SE/Cir-19/05
  dated 2-9-2005
• A trade, with a min. quantity of 5,00,000 shares
  or value of Rs.5 crore, through a single
  transaction, will constitute a block deal
• Block deals will be executed on a separate
  trading window - for a limited period of 35
  minutes a day from 9.55 am to 10.30 am
• Orders may be placed at a price not exceeding /-
  1 from the ruling market price or previous day's
  closing price as applicable
• Block deals will need to be settled in delivery
  and will not be squared off or reversed
• Stock exchanges will make public the information
  on block deals such as the scrip, client,
  quantity of shares bought/sold, traded price etc.
  on the same day, after the market hours.
• Block delas will be in addition to the disclosure
  of bulk deals. In terms of SEBI Circular
  SEBI/MRD/SE/Cir -7/2004 dt. 14-01-2004, abulk
  deal constitutes of all transactions in a scrip
  (on an exchange) where total quantity of shares
  bought/sold (in one or more transactions) is more
  than 0.5 of the no. of equity shares of the
  company.

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SEBI Law

• SEBI Press Release dated Dec 30, 2005
  (Note These are policy announcements
  based on decisions of the Board and do not
  reflect change in the existing legal framework
  until the relevant amendments are effected
  through issue of circulars.)
• Public issue refunds through Electronic Clearing
  Scheme (ECS)
• Introduction of optional grading of IPOs by
  credit rating agencies
• Rationalizing disclosure requirements for further
  public offers and rights issues
• Common platform for electronic filing and
  dissemination of corporate information
• Amendment to Takeover Regulations
• Amendment to SEBI (Delisting of Securities)
  Guidelines
• Unique Identification Number (UIN) To resume
  fresh registrations for obtaining UIN under MAPIN
  Regulations

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SEBI Law

• Amendment to Takeover Regulations
• Restrictions on market purchases, preferential
  allotments as in the Takeover Regulations to be
  removed.
• Outgoing shareholder (promoter) can sell entire
  stake to incoming acquirer in case of takeover.
• Shareholders holding more than 55 would be able
  to make further acquisitions subject to making
  open offer

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SEBI Law

• Clarifications on the revised Clause 49 of the
  Listing Agreement (Effected vide SEBI Circular
  SEBI/CFD/DIL/CG/1/2006/13 dt. January 13, 2006)
• Max time gap between two Board meetings has been
  increased from 3 months to 4 months
• Sitting fees paid to non-executive directors as
  authorized by the Companies Act, 1956 would not
  require shareholders approval
• Certification of internal controls and internal
  control systems by CEO/ CFO would be for the
  purpose for financial reporting

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Euro Issue - 2005 First Amendment

• Dated Aug. 31, 2005
• Eligibility of issuer New Paragraphs 3(1)(A) and
  3(1)(B)
• An Indian company, which is not eligible to raise
  funds from the Indian Capital Market will not be
  eligible to issue ADRs/GDRs/FCCBs under the
  Scheme.
• An Indian company which has been restrained from
  accessing the securities market by SEBI will not
  be eligible to issue ADRs/GDRs/FCCBs under the
  Scheme.
• An unlisted Indian company issuing
  GDRs/ADRs/FCCBs will be required to
  simultaneously list its shares on one or more of
  the recognized Stock Exchanges in India

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Euro Issue - 2005 First Amendment

• Eligibility of subscriber   Paragraph 3(1)(C),
  inserted by the amended Scheme, provides that
• the erstwhile OCBs which are not eligible to
  invest in India through the portfolio route and
• entities prohibited to buy, sell or deal in
  securities by SEBI
• will not be eligible to subscribe to Euro Issues.

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Euro Issue - 2005 First Amendment

• Pricing
• The amendments to Paragraph 5 of the Scheme
  provides that ADRs / GDRs issued by listed
  companies should be made at a price not less than
  the higher of the following two averages  
• The average of the weekly high and low of the
  closing prices of the related shares quoted on
  the stock exchange during the 6 months preceding
  the relevant date
• The average of the weekly high and low of the
  closing prices of the related shares quoted on a
  stock exchange during the two weeks preceding the
  relevant date.
• The relevant date means the date 30
  days prior to the date on which the shareholders
  meeting is held, under section 81(IA) of the
  Companies Act.
• Conversion price of the FCCBs will also be in
  accordance with the above provisions.
• The pricing of ADRs/GDRs as well as the
  conversion price of FCCBs of unlisted companies
  should be in accordance with the RBI Regulations
  notified under the FEMA, which talks of CCI
  Valuation Guidelines.

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CCI Valuation Guidelines Brief

• The price in the case of unlisted companies
  should not be less than the price calculated by a
  chartered accountant as per the valuation
  guidelines issued by the erstwhile CCI. In terms
  of the said guidelines, fair value of shares may
  be worked out on the basis of the following
• Net Asset Value (NAV) NAV per shares is
  calculated as under
• Post-issue net worth
• Number of Equity shares including the proposed
  issue
• Profit-Earning Capacity Value (PECV) PECV is
  calculated by capitalising the average of the
  after-tax profits of last 3 to 5 years at the
  following rates
• (i)    15 in the case of manufacturing
  companies.
• (ii)    20 in the case of trading companies.
• (iii)  7.5 in the case of intermediate
  companies, ie., companies whose turnover from
  trading activity is more than 40 but less than
  60 of their total turnover.
• Average of the NAV and PECV provides Fair Value.
  Detailed specifications in this regard are
  covered in the valuation guidelines issued by the
  erstwhile CCI.

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Euro Issue - 2005 Second Amendment

• The applicability of the amended Scheme has been
  relaxed by the Ministry for those companies which
  have already taken effective steps and thereby
  incurred costs before August 31, 2005, provided
  these companies complete their issues latest by
  December 31, 2005.
• Effective steps, for the above purpose, will
  mean the following
• That the company has completed due diligence and
  filed offering circular in the overseas
  exchange(s) or
• That approval of overseas exchange(s) has been
  obtained or
• That the payment of listing fees is made or
• That the approval of the Reserve Bank of India,
  where applicable, for meeting issue related
  expenses has been obtained.
• Private placements of issues, where no offering
  circular was placed before the overseas
  exchange(s), would not qualify for effective
  steps .

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Euro Issue 2005 Third Amendment

• Dated November 17, 2005
• The companies going in for an offering in the
  domestic market and a simultaneous or immediate
  follow on offering (within 30 days of domestic
  issue) through ADR/GDR issues wherein GDRs/ADRs
  are priced at or above the domestic price, would
  be exempt from the requirement of the revised
  pricing guidelines. Such companies will have to
  take SEBIs approval for such issue, which will
  specify the percentage to be offered in the
  domestic and ADR/GDR markets.
• It is also clarified that in terms of the First
  Amendment, 2005, unlisted companies, which have
  already issued GDRs/FCCBs and are to list in the
  domestic market, would be required to do so by
  March 31, 2006.  
• All other conditions of the First Amendment dated
  August 31, 2005 would continue to be applicable.

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Significant Judicial Pronouncements
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Judicial Pronouncements

• DCA Circulars are advisory and do not have
  mandatory effect Bhagwati Developers v. Peerless
  General Finance Investment Co. (2005) 62 SCL
  574 (SC)
• Enforceability of shareholders joint venture
  agreements even if incorporated in AOA subject
  to Section 9 of the Act Jindal Vijayanagar Steel
  Limited, In re (2005) 63 SCL 7 (CLB - Chennai)
• Share related matters
• Sub-sections (1A) and (1C) of Section 108 of the
  Act are directory Dove Investments (P.) Ltd. v.
  Gujarat Industrial Investment Corpn. Ltd. (2005)
  60 SCL 604 (Mad)
• Issue of bonus out of revaluation reserve is
  permissible Bhagwati Developers v. Peerless
  General Finance Investment Co. (2005) 62 SCL
  574 (SC)

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Judicial Pronouncements

• Corporate Directors not liable merely because of
  being directors
• For dishonour of cheque for insufficiency, etc.,
  of funds in account NI Act S.M.S.
  Pharmaceuticals Ltd. v. Neeta Bhalla 63 SCL 93
  (SC) S.V. Mazumdar v. Gujarat State Fertilizers
  Co. Ltd. (2005) 62 SCL 116 (SC) CDR. Shekhar
  Singh v. N.K. Wahi (2005) 57 SCL 9 (Del)
• For payment of wages under the Payment of Wages
  Act P.C. Agarwala v. Payment of Wages Inspector,
  MP (2005) 63 SCL 109 (SC)

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Judicial Pronouncements

• Auditors duties re. report about
  disqualification of a director under Section
  274(1)(g) Pawan Jain v. Hindusthan Club Ltd.
  (2005) 62 SCL 610 (Cal)
• A corporation or company can be prosecuted for
  any offence punishable under law Standard
  Chartered Bank v. Directorate of Enforcement (SC)
  2005
• Meetings - POA is a valid proxy Gharda Chemicals
  Ltd. v. Jer Rutton Kavasmaneck (2005) 63 SCL 222
  (Bom)

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Judicial Pronouncements

• SEBI Law Matters
• For violation of Regulation 7 of the SEBI
  Takeover Regulations, shares cannot be forfeited
  Aska Investments (P) Ltd. v. Grob Tea Co. Ltd
  (Cal)
• Receipt of communication by one Stock Exchange -
  presumption that the other Stock Exchanges also
  would have received the same NNV Finance Ltd. v.
  Securities and Exchange Board of India (SAT
  Mum) 2005
• Competition Law
• Competition Act - Composition of Commission
  Decision As the amendments which the Government
  proposed to introduce in the Parliament would
  have a clear bearing on the question raised for
  decision, the Court postponed the matter and
  decided that the same should be decided after
  amendments, if any, are carried out. Brahm Dutt
  v. Union of India (2005) 57 SCL 429 (SC)

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Proposed Law
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Committee Reports / Concept Papers

• Concept Rules on New Company Law
• J J Irani Committee on Company Law
• M H Kania Committee on SEBI Act
• O P Vaish Committee on Streamlining Prosecution
  Mechanism under Company Law
• Concept Paper on LLP Law
• Other Committees like Capoor Committee on MAPIN,
  Lahiri Committee on FII investments etc.

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Thank You !