Small Depositors (S. 58AA & 58AAA)

 

New sections 58AA and 58AAA have been added by the Companies (Second Amendment) Act, 1999 relating to small depositors and to make the offence for default in refund or acceptance of deposits to be cognizable under the Code of Criminal Procedure 1973. These sections have been inserted to bring out certain measures for good corporate governance and for protection of investors. Under section 58AA Companies are required to inform the Company Law Board within 60 days if they fail to make repayment of deposits on maturity to small deposit holders who have invested in a financial year a sum not exceeding Rs. 20,000/- in a company. The Company Law Board on receipt of the said information is required to consider these defaults reported by companies and make an order within 30 days which the concerned company is bound to comply with. A company which fails to report or comply with the order of the Company Law Board will be punishable with imprisonment of 3 years and will also be liable to fine of Rs. 500/- per day during which such default continues.

 

Invitation for acceptance of deposits from public

 

S. 58A/58B-Itivitation for acceptance of' deposits from public-Board Resolution

 

"RESOLVED that the company be allowed to invite and accept deposits from the public (including the employees of the company) up to Rs ………..which will be within the limits prescribed under Rule 3 of the Companies (Acceptance of Deposits) Rules, 1975, and that such deposits be accepted pursuant to the terms and conditions, set out in the draft placed before the Board and for the purposes of identification initialed by the Chairman.

 

RESOLVED FURTHER that the text of the advertisement in English language and in Marathi language inviting deposits from public be and is hereby approved and authority is hereby accorded to the issue of such advertisement as required under Rule 4 of the Companies (Acceptance of Deposits) Rules, 1975, in the name of the Board of Directors of the Company and the Secretary of the Company be directed to deliver a copy thereof signed by a majority of those who have been named therein as Directors of the Company or by their duly authorised agents to the Registrar of Companies, Maharashtra, for registration on or before the date of its issue, and publish it in all leading English and Marathi newspapers circulating in the State of Maharashtra.

 

RESOLVED FURTHER that the, 'form of application for deposits' either for acceptance or renewal of any deposit along with all particulars required under Rule 5(2) of the Companies (Acceptance of Deposits) Rules, 1975, the draft of which is placed before the meeting and for the purposes of identification initialed by the' Chairman, be and is hereby approved.

 

RESOLVED FURTHER that Mr ………..and Mr…………… the Directors of the company, and Mr ………. and Mr ……… General Manager and Secretary of the Company respectively, be and are hereby author­ised individually to issue temporary and 'fixed deposit' receipts on behalf of the Company and sign interest warrants/cheques and/or oth­erwise pay interest to the depositors and sign cheques by way of re­fund of deposit(s) either for premature repayment or when due in ac­cordance with the terms and conditions approved hereinbefore.

 

RESOLVED FURTHER that deposits of Rs …. be accepted by the company without invitation in accordance with the provisions of Rule 4A of the Companies (Acceptance of Deposits) Rules, 1975, subject to such terms and conditions as per the draft submitted to this meeting and initialed by the Chairman for the purpose of identification.

 

RESOLVED FURTHER that the text of the statement in lieu of advertisement containing all particulars required under Rule 4A of the Companies (Acceptance of Deposits) Rules, 1975, produced before this meeting and initialed by the Chairman for the purpose of identification, be and is hereby approved and the same be signed by all the Directors named therein or by their duly authorised agents and be delivered to the Registrar of Companies, Maharashtra, for registration."

 

PRACTICE NOTE'S

 

1. Advertisement for inviting deposit.- Rule 4 of the Companies (Acceptance of Deposits) Rules, 1975, fi-amed under section 58A of the Companies Act, provides that the text of the advertisement prescribed under this rule for the invitation of deposit from the public should be issued on the authority and in the name of the Board of Directors of the company and should contain a reference to the conditions subject to which deposits are to be accepted by the company and also the date on which the Board of Directors approves the text of the advertisement.

 

2. Validity of advertisement.- An advertisement issued in accordance with this rule is valid until the expiry of six months from the end of the financial year in which it is issued, or until the date on which the balance-sheet is laid before the company in General Meeting, or where the Annual General Meeting for any year has not been held, the latest day on which that meeting should have been held in accordance with the provisions of the Companies Act, 1956. A fresh advertisement is required to be made, in each succeeding financial year for the acceptance of deposits during that financial year. It has been clarified by the Company Law Board that the advertisement in the newspaper for each financial year shall be applicable only in the case of invitation for deposits and not for mere acceptance and any intimation to the depositor about the date of maturity of his deposit and request of renewal of his deposit on that date will amount to an invitation and, therefore, should be made by a valid ad verti semen t.44

 

3. Figures of profits and dividends for three financial years must relate to three financial years immediately preceding date of advertisement.- Any advertisement of deposit issued during the course of the financial year of a company is valid only up to the end of that financial year and the requirement of mentioning figures of profits and dividends of the company for three financial years must relate to the three financial years immediately preceding the date of that advertisement. 45

 

4. Advertisement to be in language of vernacular newspaper.- Any advertisement of deposit, published in the vernacular newspaper, must be in the languae of that paper, that is, in that vernacular language and must not be in any other language.

 

5. Text of advertisement both in English and in regional language to be approved by Board.- Texts of advertisement, both in English language and in regional language, must be approved by the Board of Directors and both the texts must be filed with the Registrar of Companies before their publication in the two newspapers .

 

6. Alterations in terms and conditions and rate of interest to be done by giving full advertisement.- Rule 4 of the Companies (Acceptance of Deposits) Rules, 1975, as worded is such that no advertisement can be issued without prior approval of the Board of Directors, of the text thereof. Any change in the material facts of the contents of the advertisement should also be amended with the approval of the Board and changed text of advertisement should be delivered to the Registrar for registration again before its publication. The Department of Company Affairs has clarified that any alteration in the terms and conditions of deposits including a change in the rates of interest must be done by giving a full advertisement in the prescribed form and not by making only an announcement as to alterations made.

 

7. Penalty for default.- If any deposit is accepted or invited in excess of the prescribed limits or in contravention of the prescribed manner or condition or in contravention of the provisions of sub-section (2) of section 58A, the company will be punishable with fine of the amount of deposit accepted in contravention as aforesaid and a fine of Rs. 10/- lakhs but not less than Rs. 50,000/- in case of contravention relating to invitation of deposits. Every officer of the company who is in default will be punishable with imprisonment of 5 years and also liable to fine. [Section 58A(6)].

 

Issue of advertisement for acceptance of deposits from public including employees

 

S. 58A-Issue of advertisement for acceptance of deposits from public including employees-Board Resolution                                                                                                                                                                    

 

"RESOLVED that the advertisement, pursuant to section 58A(2) (b) of the Companies Act, 1956, for inviting deposits from public including employees be issued and the draft thereof tabled before the Board and initialed by the Chairman for purposes of identification be and is hereby approved and the Secretary of the Company be and is hereby authorised to have it published at least in three newspapers having circulation throughout the country, after getting it signed by a majority of directors and after delivering a copy to the Registrar of Companies, NCT of Delhi and Haryana for registration.

 

RESOLVED FURTHER that the form of application and the statement of particulars as per draft thereof placed before the Board and initialed by the Chairman for purposes of identification be and are hereby approved.

 

RESOLVED FURTHER that the Managing Director and the Secretary of the Company be and are hereby authorised jointly to sign receipts for deposits received by the company."

 

PRACTICE NOTES

 

1. Compliance with Companies (Acceptance of Deposits) Rules, 1975.- Ensure that the provisions of the Companies (Acceptance of Deposits) Rules, 1975 as amended to date are scrupulously complied with.

 

2. Form of advertisement to be exactly same as approved by the Board.- The form of advertisement published should be exactly the same as approved by the Board and should incorporate therein such modifications or changes as may have been made therein by the Registrar of Companies.

 

3. Form of application and statement of particulars to be same as approved by the Board.- The form of application and the statement of particulars delivered to the applicant making deposits should be the same as approved by the Board. No deposit should be accepted before the advertisement is published or on any other form of application except the one which has been approved by the Board.

 

4. Deposits repaid on maturity.- En sure that the deposits are repaid on maturity and at no time their percentage exceed the limit prescribed in that respect under the rules. The advertisement should be published at the commencement of each financial year of the company and shall be valid only for that year.

 

5. Fresh approval of Board required for publication of advertisement in next financial year.- Fresh approval of the Board will be necessary when the advertisement is published in the next financial year, as such an advertisement is valid until the expiry of 6 months from the date of closure of the financial year in which it is issued [Rule 4(3)].

 

6. No acceptance of deposit in new financial year on the basis of previous year advertisement.- No deposit can be accepted in the new financial year on the basis of the advertisement published at the commencement of the previous financial year.

 

7. Resolution under section 292 in addition to section 58A to be passed.-Resolution pursuant to section 292 for borrowing has to be passed in addition to the resolution under section 58A. While offering the rate of interest, check up the maximum rate of interest prescribed in this behalf under the rules.

 

8. Payment of brokerage.-Brokerage in excess of one per cent of the deposit for a period up to one year, one and half per cent of the deposits for a period of more than one year but up to two years, and two per cent of the deposits for a period exceeding two years is not permissible. The payment of brokerage should be kept within this limit.

 

9. Obtaining of approval of Reserve Bank for acceptance of deposits from persons/companies outside India.-While accepting deposits from persons/companies outside India approval of the Reserve Bank of India should be obtained and also ensure that all RBI instructions issued in that connection be complied with.

 

10. Application to Central Government for extension of time.-As soon as it is apprehended that it may not be possible to repay the deposits on maturity, and an extension of time would become necessary, make an application to the Central Government pursuant to section 58A(8) of the Act.

 

11. Investment of at least 15% of amount of deposits.-Deposit or invest at least 15% of the amount collected by way of deposit accepted and maturing during the year ending on the 31st March, next following by 30th April of each year:

 

(a)        In a current or other deposit account with any scheduled Bank free from charges or lien.

(b)        In unencumbered securities of Central Government or any State Government, and

(c)        In an unencumbered securities mentioned in clauses (a) to (d) and (ee) of section 20 of the Indian Trusts Act, 1882.

(d)        In unencumbered bonds issued by the Housing Development Finance Corporation Limited, Bombay, a company incorporated under the Companies Act, 1956 (1 of 1956), and notified under clause (i) of section 20 of the Indian Trusts Act, 1882 (2 of 1882).

 

12. Deposits accepted from directors or shareholders in joint names exempted- While calculating the limits prescribed for the acceptance of deposits, do not include amounts of deposits received from Directors by the non-financial non-banking companies and in the case of non-banking, non-financial private limited companies, amounts received from shareholders are also excluded from deposits. On the private company be coming a deemed public company pursuant to the provisions of section 43A, amounts which become "deposits" as a consequence thereof may be repaid in accordance with the term of their acceptance.

 

13. Advertisement to contain reference to conditions subject to which deposits accepted by company.-The advertisement must contain a reference to the conditions subject to which deposits shall be accepted and the date on which it was approved by the Directors. The advertisement is to be published in a leading English newspaper in English and in one vernacular newspaper in vernacular language circulating in the State in which the registered office of the company is situate.

 

14. Filing of statement in lieu of advertisement with Registrar.-If the company intends to accept deposits, without inviting such deposits either by itself or by allowing or causing any other person to invite deposits on its behalf, deliver to the Registrar of Companies for registration a statement in lieu of advertisement before accepting any such deposits. This statement should include all the particulars which are required to be included in the advertisement and should likewise be signed by the majority of the Directors of the company.

 

15. Validity period of advertisement or statement in lieu of advertisement.- The advertisement or the statement in lieu thereof shall be valid up to six months from the date of the closure of the financial year in which it is issued or delivered or until the date on which balance-sheet is laid before the company in General Meeting or where the Annual General Meeting for any year has not been held, the latest day on which that meeting should have been held in accordance with the provisions of the Act, whichever is earlier.

 

16. Filing of Return in Form 10 of the Companies (Acceptance of Deposits) Rules, 1975.-File a return" as mentioned in Rule 10 of the Companies (Acceptance of Deposits) Rules, 1975, on or before 30th June every year with the Registrar of Companies and furnish a copy of the return simultaneously to the Reserve Bank of India.

 

17. Offence under the section continuing one.-It was earlier held by the Andhra Pradesh High Court that the offence under the section is of a continuing nature and a fresh period of limitation commences with every successive day of default,49 but the Madras High Court has held that the degree of liquidity required by Rules 3A and 11 of the Companies (Acceptance of Deposits) Rules, 1975 and a company's failure to maintain the requisite liquidity has been held to be not a continuing offence. The limitation period of 6 months would apply.50

 

18. Penalty.- Failure to file a return as required by Rule 10 of the Companies (Acceptance of Deposits) Rules, 1975, which is punishable by Rule 11 is a continuing offence and there is no period of limitation within which proceedings may be taken.

 

19. Section 58A and Rules not ultra vires legislative power.- Section 58-A and the Rules framed under it are not ultra vires the legislative power of the Parliament.

 

20. Constitutional validity.-The Supreme Court has also held that section 58A is constitutionally valid. It is not outside the legislative competence of Parliament to enact such a provision as it falls within the scope of Entries 43 and 44 of List I of the Seventh Schedule to the Constitution.

 

21. Employees and ex-employees fall in the category of public.-The employees and ex-employees are also to be regarded as those falling in the category of 'public' and the deposits accepted from them would as such attract the provisions of section 58A and the rules made there under as deposits from other categories of 'public' .

 

22. Amount received by private company from shareholders not deposit.-Any amount received by a private company from its shareholders is not regarded as 'deposit' in terms of sub-clause (lx) of clause 2(b) of the Deposits Rules.

 

23. Loans taken by private company.- If a shareholder- depositor ceases to be a member the deposit made by him cannot be treated as exempted deposit.55

 

24. Loans not termed as deposit.-The loan taken by a private company from a firm, all of whose partners are shareholders of the borrowing company will stand on the same footing as loans taken from the shareholders themselves. Such loans are not to be regarded as deposits.

 

25. Determination of limits of deposits.-It is essential to deduct the amount of un provided depreciation from the aggregate of paid-up capital and free reserves for deter mining the limits up to which deposits can be accepted by a company, for purposes of Explanation to Rule 3 of the Companies (Acceptance of Deposits) Rules, 1975 .

 

26. Computation of limit for acceptance of deposits.-The limits up to which a company can accept deposits are to be computed with reference to aggregate of paid-up capital and free reserves as appearing in the latest audited  balance-sheet of the company and any change arising thereafter is to be disregarded .

 

27. Amount through issue of bond or debentures not exempt deposit.-Any amount through issue of bonds or  debentures does not ipso facto become exempt deposit under Rule 2(b)(x). It would be treated as exempt deposit if later on it is secured by mortgage by an immoveable property.

 

28. Term "interest"-Meaning.- The rules do not specify whether the interest should be simple or compound. The term 'interest' is a generic term which may be simple or compound .

 

29. Renewal amounts to fresh deposit.-Renewal amounts to receiving fresh deposits within the meaning, of section 58A

 

30. Matured deposits unclaimed/unpaid treated as deposits.-The matured deposits which remain unclaimed/unpaid are deposits within the meaning of Rule 2(b) of the Companies (Acceptance of Deposits) Rules, 1975, and are required to be treated as such for calculating the limits prescribed in Rule 3 thereof.62

 

31. Transfer of matured deposits.-Matured deposits remaining unclaimed and unpaid for a period of 7 years with the company should be transferred to Investor Education and Protection Fund .

 

32. Provisions governing prospectus including civil and criminal liabilities for misstatement applicable to advertisement for public deposit.-The provisions governing the prospectus including those relating to civil and criminal liabilities for misstatement, penalty for fraudulently inducing persons to make deposits with any company will mutates mutandis apply to the advertisement for deposits.

 

Inviting Deposits from Public and Shareholders

 

S. 58A- Inviting Deposits from. public and shareholder-Board Resolution

 

RESOLVED that pursuant to the provisions of the Companies (Acceptance of Deposits) Rules, 1975 and subject to the provisions of Section 58A of the Companies Act, 1956 and subject to other approvals and sanctions the Board hereby accords its approval to the Company to borrow money by way of deposits from the shareholders of the company and the public by making an invitation on the basis of audited accounts for the year ended on and texts of advertisements in English and Hindi placed on the Table and initialed by the Chairman for purposes of identification be and are hereby approved.

 

RESOLVED FURTHER that the Managing Director of the Company be and is hereby authorised to file the advertisement duly signed by the Directors on the Board with the Registrar of Companies and have the same published in leading English and Hindi Newspapers.

 

RESOLVED FURTHER that the Managing Director of the company be and is hereby authorised to appoint brokers at the places as may be considered necessary on payment of brokerage as stipulated in the said Rules.

 

RESOLVED FURTHER that Shri ……… Secretary and  Shri ……….. Financial Controller be and are hereby jointly authorised to sign and do all such acts and things as may be deemed necessary in this regard."

 

PRACTICE NOTES

 

1. Constitutional validity of section 58A and Deposit Rules.-Section 58A and the Rules framed under it are not liltra vires the legislative power of Parliament. (Ahmedabad Matz lifactu ring and Calico Co. v. Union of India, (1983) 53 Com Cases 904 (1)13)(Guj); Delld Cloth & General Mills Co. Ltd. v. Union of India, (1983) 54 Comp Cas 674).

 

2. Quantum of deposit should be as per latest balance-sheet.-The ceiling on deposit should be reckoned with reference to the latest available authentic figures (Malayala Manorania Co. Ltd. v. Registrar of Companies, Kerala, (1990) 69 Comp Cas 339 (Ker)).

 

3. Complaint to contain terms and conditions of deposit.-It would be necessary for a complainant under section 58A to specify in the complaint or to furnish afterwards the terms and conditions of the deposits and the dates of maturity because without such particulars it would be very difficult for CLB to come to a positive conclusion as to the alleged violation (Kanak Vinod Melita (Mrs.) v. Jyoti Wire Industries Ltd., (1991) 72 Com Cases 366).

 

4. Exemption to Small Scale Industrial Units.-Companies which are Small Scale Industrial Units and fulfil the following conditions, namely:

 

(a) The paid-up capital of the company does not exceed Rs. 25 lakhs;

(b) The company accepts deposits from not more than 100 persons;

(c) There is no invitation to public for deposits; and

(d) The amount of deposits accepted by the company does not exceed Rs. 20 lakhs or the amount of its paid-up capital, whichever is less,

 

are exempted from the provisions of section 58A. '

 

(e) Investment in plant and machinery is not in excess of Rs. 1 crore.

 

5. Failure to rile return punishable by Rule 11 of the Deposit Rules.-Failure to file a return as required by Rule 10 of the Companies (Acceptance of Deposits) Rules, 1975 which is punishable by Rule II is a continuing offence and there is no period of limitation within which proceedings may be taken. (U.P. Paper Corporation Pvt. Ltd. v. Registrar of Companies, (1987) 61 Com Cases 728 (Cal)).

 

6. Filing of complaint after expiry of six months barred by limitation.-An offence under the Rules is complete on 30th June each year and therefore the filing of a complaint after the expiry of six months from that date is barred by limitation (Shree Dharma Sugar Industries P. Ltd. v. ROC, (1989) 66 Com Cases 337 (Kar)).

 

7. Delayed application by depositor.-An application filed by a partner of a firm before the Company Law Board 5 years after the appropriation of the deposit amount towards the suit amount filed by the company for recovery of sums due him for seeking direction for repayment was not allowed the remedy under section 58(9) in the circumstances of the case. Pushpa Singh v. BPL Ltd., (2002) 110 Com Cases 82 (CLB).

 

8. Companies (Compliance) Rules, 2001.-Companies whose paid-up share capital is less than Rs. 2 crores but equal to or more than Rs; 10 lakhs must obtain a Compliance Certificate from a secretary in whole-time practice every year to be filed with the Registrar of Companies mentioning therein inter alla that the company has complied with the provisions of section 58A and 58AA read with the Companies (Acceptance of Deposit) Rules, 1975, as per paragraph 23 of the Form of Compliance Certificate appended to the Companies (Compliance Certificate) Rules, 2001.

 

Advertisement for public deposits, acceptance and renewal of

deposits (Another format)

 

S. 58AI58B-Advertisement for public deposits, acceptance and renewal of deposits-Board Resolution

 

"RESOLVED that the amended texts of advertisement in English and Marathi, incorporating current information and updated figures as per the drafts submitted to the Board and initialed by the Chairman for identification, be and are hereby accepted and approved as texts of further advertisement.

 

RESOLVED FURTFIER that the amended form of application for deposits either for acceptance or renewal, as per the draft placed be fore this meeting, be and is hereby approved and accepted as the only form of application for deposits henceforth.

 

RESOLVED FURTHER that the texts of advertisement, as hereby accepted and approved and duly signed by the majority of the Directors named therein or by their authorised agents, be delivered to the Registrar of Companies, Maharashtra, for registration thereof before the release of the said texts of advertisement for newspapers and/or otherwise for issue in any other respect.

 

RESOLVED FURTHER that in supersession of the previous authority conferred on the persons concerned in this regard, Mr ………… and Mr ………… the Directors of the company, and Mr ……….and Mr …… General Manager and Secretary of the company respec­tively, be and are hereby individually authorised to accept deposits, is­sue temporary and 'fixed deposit' receipts and sign interest warrants, cheques and/or otherwise pay interest to the depositors and sign cheques by way of refund of deposit(s) either for the premature re­payment or when due in accordance with the terms and conditions al­ready approved by the Board.

 

RESOLVED FURTHER that public deposits already accepted by the company be renewed as per the requests received from the existing deposit holders on the same terms and conditions.

 

RESOLVED FURTHER that the renewal application forms and statement of particulars pursuant to Rule 5(2) of the Companies (Acceptance of Deposits) Rules, 1975, be supplied to the deposit holders."

 

PRACTICE NOTES

 

1. Term "Deposit"-Meaning.-Definition of 'deposit' in Rule 2(l) of the Compa­nies (Acceptance of Deposits) Rules, 1975, includes all amounts borrowed by a company, except those borrowings specifically excluded by that rule. In the Reserve Bank of India Act, the term 'deposit' is defined to include 'any money received by way of deposit or loan or in any other form but shall not include amounts r  aised by way of share capital'. The definition has a bearing on the quantum of deposits a company can accept from the public including its employees and the shareholders (if not a private company) and such quantum is limited to twenty-five per cent of the paid-up capital and free reserves of a company.

 

An unsecured loan for which no receipt was given by the company and was repayable at 18% interest per annum was held to be not a deposit. V. Srinivas v. Machines and Machine Tools (P.) Ltd., (2002) 110 Com Cases 55 (CLB).

 

2. Deposits accepted from directors or shareholders in joint names exempt.-Rule 2 (b) (ix) of the Companies (Acceptance of Deposits) Rules, 1975, exempts any amount received by a company from its Directors or shareholders (in the case of a private company) from the definition of deposit, but any amount received by a company in the joint names of a Director and a non-Director or in the joint names of a shareholder and a nonshareholder, will not be so exempted. Moreover, if a company receives any amount from a firm, then to avail of this exemption all the partners of that particular firm must be the Directors of the borrowing Company.

 

3. Amount received by private company from directors and shareholders not treated as deposits.-Any amount received by a private company from its Directors and shareholders will not be treated as deposits accepted by that private company and, thus, will not be counted in arriving at the limits specified in the rule. 66

 

4. Unsecured debentures with option for conversion not covered by section 58A.Rule 2(b)(x) does not cover unsecured debentures with an option to convert them into shares of the company and so long this option is attached to these unsecured debentures, they shall remain outside the restriction of Section 58A .

 

5. No contravention of Rule 3 when acceptance of deposits by companies exceeds limit on account of losses.-The limit of deposit to be accepted by a company is prescribed in Rule 3 of the Companies (Acceptance of Deposits) Rules, 1975, as a certain percentage of paid-up share capital and free reserves of a company and with the increase or decrease of the paid-up share capital and free reserves of a company, its limit of deposits will also increase or decrease. So, if a company incurs losses and its paid-up capital and free reserves are reduced, then the deposits already accepted by the company will exceed the limit but it will not contravene the provisions of Rule 3 if they were within limits when they were accepted and they are to be returned on maturity .

 

6. Determination of limits for deposit.-Explanation to Rule 3(2) of the Companies (Acceptance of Deposits) Rules, 1975, provides for certain items to be deducted from the aggregate paid-up share capital and free reserves of a company for determining the limits of deposits to be accepted and accumulated loss which is one of such items should include un provided depreciation.

 

7. Balance in share premium account to be treated as paid-up capital and not free reserves.-Balance shown in the share premium account should be treated as part of a company's paid-up share capital and not its free reserves, as stated in Rule 2(d) of the Companies (Acceptance of Deposits) Rules, 1975 .

 

8. No contravention of Rule 3A when repayment of deposits to be made.-Rule 3A of the Companies (Acceptance of Deposits) Rules, 1975, requires a company to invest or deposit before the 30th April every year fifteen per cent of the deposits maturing during the year till March 31 next year but where a company has to repay deposits in the month of April itself, then it is not required to keep any deposit mentioned above and this will not be contravention of Rule 3A .

 

9. Signature of authorised agents of directors on advertisement.-Authorised agents of Directors entitled to sign the advertisement for public deposits on behalf of the Directors may be ordinarily authorised by a letter signed by the concerned Director and need not be authorised by a power of attorney .

 

10. No reduction in rate of interest when deposits converted into secured debentures.-Rule 8 of the Companies (Acceptance of Deposits) Rules, 1975, provides for one per cent reduction of interest in case of premature repayment of deposits. Where, however, these deposits are converted into secured debentures of the company, there will be no reduction in the rate of interest provided such conversion is effected with the consent of the depositor and conforms to the prevailing guidelines of the Government of India relating to issue of right debentures .

 

11. Acceptance of loans by mortgage of assets under Non-banking Non-financial Companies (Reserve Bank) Directions to be regarded as deposits.-Acceptance of loans secured by mortgage of assets of a company under Non-banking Non-financial Companies (Reserve Bank) Directions, 1966, are to be regarded as deposits and must be repaid in accordance with the provisions of section 58A(3)(a) of the Companies Act, 1956 .

 

12. Power of Central Government with regard to extension of time and exemption.-Section 58A(8) of the Act provides that the Central Government may, at its discretion, grant extension of time to any company or exempt any company from complying with the provisions of this section. The question, as to whether promoters' contribution is to be regarded as deposits or not will be decided by the Central Government on the merit of each case and it will not be straightway exempt.

 

13. Filing of return by non-banking non-Financial company.-A non-banking nonfinancial company accepting public deposits must file a return of deposits with the Registrar of Companies within 30th June of each year and such return must contain information till 31st March of that year and must be duly certified by the Auditor of the company. A copy of this return of deposits must also be simultaneously furnished to the Chief Officer, Department of Non-Banking Companies, Reserve Bank of India, Calcutta. This return must be in the form annexed to the Companies (Acceptance of Deposits) Rules, 1975.

 

14. Provisions relating to prospectus apply to advertisement for public deposits.- The provisions of section 58B are such that any advertisement made by a company inviting deposits from public, pursuant to section 58A, is to be treated as a 'Prospectus' and all the provisions of the sections of the Companies Act applicable to prospectus are mutates mutandis applicable to advertisement for inviting deposits from public. The Directors should, therefore, be careful in seeing that all the formalities as laid down in the Companies (Acceptance of Deposits) Rules, 1975, as well as the provisions of section 58A of the Companies Act, are complied with while making any change in the text of advertisement, terms and conditions of invitation or acceptance of public deposit, Board approval is duly accorded to authorise such amendment and arrangement is made to deliver such amended documents to the Registrar of Companies for the purpose of registration thereof

 

15. Advertisement for public deposits to correspond to provisions relating to prospectus.-While clarifying on the applicability of section 58B, it has been notified by the Central Government that any advertisement for public deposits must ordinarily correspond to the provisions relating to prospectus in the Companies Act except where specific provisions to the contrary have been made in section 58A or in the Companies (Acceptance of Deposits) Rules, 1975, and in this context the words "so far as may be" appearing in section 58B are significant

 

16. Time barred complaint.-A complaint filed 6 months after an advertisement was inserted inviting deposits without approval was quashed. Though it was not clear whether the Department had come to know of the advertisement that very day, the Department was supposed to have knowledge from the fact that the company had filed an application for approval that very day. Additional Registrar of Companies v. Perfect Benefit Fund Ltd., (1999) 97 Com Cases 731 (Mad).

 

Acceptance/Renewal of deposit without invitation

 

S. 58A-Renewal or Acceptance of Deposits without invitation-Board Resolution

 

"RESOLVED that the company renew the existing deposits and accept fresh deposits without inviting or allowing or causing any person to invite deposits and that Shri …….. Secretary of the Company be and is hereby authorised to file the statement in lieu of advertisement with the Registrar of Companies before such acceptance or renewal."

 

PRACTICE NOTES

 

1. Acceptance without invitation.-Section 58A(2) will apply only if the company invites deposits. If the company does not invite deposits but accepts or renews uninvited deposits, the requirements of Rule 4A of Companies (Acceptance of Deposits) Rules, 1975 will have to be complied with.

 

2. Statement in lieu of advertisement.-A company when accepts deposit without invitation, it should file with the Registrar of Companies a statement in lieu of advertisement before accepting deposits. Such statement should cover all those information and particulars which are required to be given in the published advertisement under Rule 4(2) of the Companies (Acceptance of Deposits) Rules, 1975.

 

Compliance with Companies (Acceptance of Deposits)

Rules, 1975

 

S. 58A-Compliance regarding maintenance of liquid assets-Board Resolution

 

"RESOLVED that in pursuance of Rule 3A of the Companies (Acceptance of Deposits) Rules, 1975, a sum of Rs. 3,00,000 being 15% of the amount of public deposits maturing as on 31-3-2002, be deposited with the ………. Bank ………..Branch for a period of one year.

 

RESOLVED FURTHER that Mr. A.B. and Mr. C-D, Directors of the Company be and are hereby jointly authorised to open a Deposit Account with the …………..Bank ………..Branch for this purpose."

 

PRACTICE NOTES

 

1. Maintenance of liquid assets.-As per Rule 3A, every company should before the 30th April of each year deposit or invest not less than 15% of the quantum of deposits maturing during the year ending on the 31st March next following either in a current or deposit account in a scheduled bank, free from charge or lien, in unencumbered securities of the Central or State Government or in unencumbered securities mentioned in clauses (a) to (d) and (ee) of section 20 of the Indian Trusts Act, 1882, or in unencumbered bonds issued by the Housing Development Finance Corporation Limited Bombay, a company incorporated under the Companies Act, 1956 and notified under clause (i) of section 20 of the Indian Trusts Act, 1882.

 

2. Constitutional validity of Rules.-The vires of this Rule was challenged before the Supreme Court, which, however, upheld the constitutional validity of this Rule.

 

3. Amount deposited to be utilized for repayment of deposits.-The amount deposited or invested in pursuance to this Rule can be utilised only for repayment of deposits maturing during the year, while continuing to maintain the 10% margin.

 

4. Complaint made by ROC.-Registrar of Companies is a competent person to file a complaint even in the matter of non-banking financial companies which failed to furnish to the ROC the requisite statement with details. Vishwapriya Financial Services and Securities Ltd. v. ROC, (2002) 108 Com Cases 160 (Mad).

 

Application for extension of time or exemption from provisions

of section 58A

 

S. 58A(8)-Application for extension of time or exemption from provisions of section 58A-Board Resolution

 

"RESOLVED that consent of the Board of Directors be and is hereby given to the company making an application to the Central Government pursuant to sub-section(8) of section 58A of the Act requesting for an extension of time for the repayment of deposits maturing/matured for repayment during the period.

 

RESOLVED FURTHER that Mr. XYZ, the Managing Director be and is hereby authorised to sign and verify the application and take all such steps and to do all such acts or things as may be necessary for getting an order on the application from the Central Government."

 

"RESOLVED FURTHER that consent of the Board of Directors be and is hereby given to the company making an application to the Central Government pursuant to sub-section (8) of section 58A of the Act requesting for exempting the company from complying with the provisions of Rule/Rules No ……of the Companies (Acceptance of Deposits) Rules, 1975.

 

RESOLVED FURTHER that Mr. XYZ, the Managing Director be and is hereby authorised to sign and verify the application and take all such steps and to do all such acts or things as may be necessary for getting an order on the application from the Central Government."

 

PRACTICE NOTES

 

1. Publication of General Notice in newspapers before making application.-Before applying, publish a general notice in Form No. 2 of the Companies (Application for Extension of time or Exemption under sub-section (8) of section 58A) Rules 1979 addressed to the members at least once in English language and once in vernacular language in newspapers of these two languages having wide circulation in the region in which the registered office of the company is situate.

 

2. Application to Central Government for extension of time for repayment of deposits and documents to be annexed therewith.-Draw up the application in the form prescribed i.e., Form No. I to the Companies (Application for Extension of time or Exemption under sub-section (8) of section 58A) Rules, 1979. The following documents are to be attached to the application:

 

(i) Certified true copy of the Articles of Association of the company.

(ii) Certified true copy of audited accounts of the company for the last three years.

(iii) Certified true copy of Director's Report and Auditors' Report for the last three years.

(iv) Certified true copy of the Board Resolution.

            (v) One copy each of the quarterly, half yearly or other pro forma account of the company subsequent to the latest audited accounts.

(vi) Cuttings of newspapers evidencing that the general notice was duly published.

(vii) One copy each of the advertisement issued in the newspapers pursuant to rule 4 of the Companies (Acceptance of Deposits) Rules, 1975.

(viii) A crossed Demand Draft in favour of the Pay & Account Officer, Department of Company Affairs, New Delhi and payable at, New Delhi, for requisite application fees prescribed by the Companies (Fees on Applications) Rules, 1999.

(ix) Deliver a copy of the application along with a copy each of the documents annexed simultaneously to the Registrar of Companies.

(x) Send to the Stock Exchange with which the company is enlisted copies of notices published in the newspapers.

 

3. Refusal of permission by the Central Government.-Where an application for retaining matured deposits is rejected by the Central Government on the ground that the grant of permission would amount to renewal of the deposits in contravention of the provisions of section 58A and such an application does not lie in respect of deposits which had matured in view of section 58A(10) the Court held that the Central Government has passed the order without considering the company's representation to explain that such retention of matured deposit would not amount to renewal of deposits in contravention of provisions of section 58A and that such an administrative order amounted to a flagrant violation of the principles of natural justice. Carrier Savings and Investment India Ltd. v. Union of India, (2002) 110 Com Cases 631 (Raj).

 

4. Repayment Scheme of deposit.-Company failed to repay accepted deposits to depositors and they made an application under section 58(9) to the Company Law Board and the company submitted a repayment scheme to the Board which was approved by it. Global Infrastructure & Technologies Ltd., Re, (2001) 29 SCL 34 (CLB-Mumbai).

 

5. Citizen's Charter.-As per the Citizen's Charter of the Department of Company Affairs the application to the Central Government as mentioned aforesaid is required to be processed within 15 days. [File No. 5/25/99-CL-V; Press Note No. 9/99 dated 9-81999].

 

Moratorium under Sick Industrial Companies

(Special Provisions) Act

 

S. 58-AM-Moratorium under SICA-Board Resolution

 

WHEREAS the company was unable to pay the principal and interest of the fixed deposit holders and the fixed deposit holders made applications to the Company Law Board under section 58A(9);

 

AND WHEREAS the company proposed a scheme of repayment of 75% of the deposits in 2001 and balance in 2002 before the Company Law Board;

 

AND WHEREAS the Company Law Board accepted the proposal of the company subject to the approval of the BIFR under Sick Industrial Companies (Special Provisions) Act, 1985;

 

NOW, THEREFORE, IT IS RESOLVED THAT the company make the repayment of the fixed deposit holders whose names appear in theRegister of Deposits on …….of Rs ……by December 31, 2001 being 75% of the total deposit due to the fixed deposit holders as…..on …..and the balance remaining due to the fixed de­ posit holders on or before 31st December, 2002 to the tune of Rs ..............

 

RESOLVED FURTHER THAT the Secretary be and is hereby directed to take necessary steps to ensure due repayment to the fixed deposit holders as per the aforesaid schedule and file an affidavit of compliance with the Company Law Board as to the due compliance of the scheme as approved by the Company Law Board.

 

PRACTICE NOTES

 

1. Moratorium to relief undertakings-According to the department's circular dated 19-2-1990, a moratorium has been granted to relief undertakings. In terms of this circular, where financial assistance to relief undertakings have been provided under different Acts promulgated by several States, the State Governments have notified that in relation to any relief undertakings and in respect of the period for which the relief undertakings continues as such any right, privilege, obligation or liability accrued or incurred before the undertaking was declared a relief undertaking and any remedy for the enforcement thereof shall be suspended and all proceedings relating thereto pending before any court, tribunal, officer or authority shall be stayed including the proceedings under S. 58A(9).

 

2. Approval of BIFR necessary-If a company is already under reference to BIFR under the Sick Industrial Companies (Special Provisions) Act, 1985, the Company Law Board has directed the petitioner under section 58A(9) to approach the BIFR first for necessary approval in order to allow Company Law Board to continue its proceedings under the said section. [Uniplus India Ltd., Re, (1997) 90 Com Cases 74 (CLB-N. Delhi)].

 

Nomination facility given to deposit-holders

 

S. 58A(II)-Nomination facility given to deposit-holders-Board Resolution

 

RESOLVED that henceforth the application forms for inviting fixed deposit of the company be added with a specific provision to make a nomination by each and every fixed deposit-holder in favour of any person of his or their choice;

 

RESOLVED FURTHER that the Secretary of the company be directed to take steps to have the forms of fixed deposit printed accordingly.

 

PRACTICE NOTES

 

1. Insertion by the Companies (Amendment) Act, 1999-The Companies (Amendment) Act 1999 has, with effect from 31st October, 1998 added a new sub-section(I 1) to section 58A of the Act to allow a depositor to make a nomination in the prescribed manner (in terms of the new section 109A) a person to whom his fixed deposit would vest in the event of his death. In case of transmission of fixed deposits this provision would help the nominee to have the fixed deposit endorsed in his name without any difficulty. This provision is in addition to the existing provisions applicable to all fixed deposits. The said nomination should be in Form No. 2B.

 

2. Prescribed manner-Section 109A read with sub-section(I 1) of section 58A makes a provision for nomination in the prescribed manner. The Central Government has prescribed as mentioned aforesaid the manner in which such nomination is to be made by its fixed deposit-holders which can be done singly or jointly as the case may be. Every company is required to follow the said manner while making provision for nomination in each and every application form which are to be distributed to the prospective fixed deposit holders while inviting any fixed deposits of a company.

 

Transfer of matured deposit to the Fund

 

S. 58A read with S. 205(2)(c)-Transfer of matured deposits remaining unclaimed and unpaid to Investor Education and Protection Fund Board Resolution

 

"RESOLVED that the amount of matured deposits of Rs ……remaining unclaimed and unpaid with company for a pe­riod of 7 years from date they became due for payment be and is hereby transferred to the Investor Education and Protection Fund.

 

RESOLVED FURTHER that the Secretary of the company be and is authorised to do the needful for effecting such transfer."

 

PRACTICE NOTES

 

1. Investor Education and Protection Fund.-Under clause (c) of sub-section (2) of section 205C all the matured deposits remaining unclaimed or unpaid with the company for a period of 7 years from the date the said deposits become due for payment should be transferred to the Investor Education and Protection Fund.

 

2. Fund Rules.-Central Government has framed Investor Education and Protection Fund (Awareness and Protection of Investors) Rules, 2001 under which the matured deposits required to be deposited with the said Fund should be remitted to the concerned branches of Punjab National Bank within 30 days of such amount becoming due to be credited to the Fund. This should be done by obtaining three copies of treasury challans from the said bank and filling them up and tendering the amount along with the said filled up treasury challans and the bank will return two copies of the challan duly stamped to the company as token of having received the money.

 

3. Filing with ROC.-File with the Registrar of Companies one copy of the challan evidencing deposit of the amount to the Fund and also a statement in Form No. I given in the aforesaid Rules of the Fund duly certified by a Chartered Accountant or a Company Secretary or a Cost Accountant practising in India or by the statutory auditors of the Company.

 

Informing CLB about default in payment to small depositors

 

S. 58AA-Informing Company Law Board about default in payment to small depositors-Board Resolution

 

WHEREAS the company has made default in repayment of deposits and or part thereof or; any interest thereupon to the following small depositors :

 

(1) Mr . ...............

(2) Mrs . ...............

(3) Miss . ...............

(4) Mr . ...............

(5) Mr . ...............

 

AND WHEREAS under clause (b) of sub-section (2) of section 58AA, the Company is required to intimate to the Company law Board within 60 days from the date of default;

 

NOW THEREFORE IT IS RESOLVED that an intimation be given to the Company Law Board immediately including particulars in respect of the names, addresses of each of the above-mentioned small depositor, the principal sum of deposits due to them and interest accrued thereupon.

 

RESOLVED FURTHER that the Secretary of the Company be and is hereby authorised to sign and submit the said intimation to the Company Law Board and take necessary steps in connection therewith.

 

PRACTICE NOTES

 

1. Meaning of small depositor.- A small depositor means a depositor who has invested in a financial year a sum not exceeding Rs. 20,000/- in a company. [Section 58AA(I I) Explanation].

 

2. Prohibited to accept further deposits.-A company should not accept further deposits from small depositors, unless each small depositor, whose deposit has matured, had been paid the amount of the deposit and the interest accrued thereupon. [Section 58AA(4)].

 

3. Deposits exempted.- Provisions of section 58AA will not apply to any deposit which has been renewed by the small depositor voluntarily or whose repayment has become impracticable due to the death of the small depositor or whose repayment has been stayed by a competent court or authority. [Section 58AA(4) proviso].

 

4. Penalty for default.- Whoever knowingly fails to comply with the provisions of section 58AA or with any order of the Company Law Board will be punishable with imprisonment of 3 years and will also be liable to fine of Rs. 5001- for every day during which such non-compliance continues. [Section 58AA(9)].

 

Constitution of Committee to decide matters regarding public issue

 

S. 60-Constitution of Committee to decide matters regarding public issue Board Resolution

 

"RESOLVED that a Committee consisting of Shri ................. Shri ……. Shri …… and Shri ……. Directors of the Company be and is hereby constituted to decide all matters relating to public issue and allotment of shares in consultation with the Stock Exchanges concerned and SEBI as also issue of share certificates in accordance with the relevant rules."

 

PRACTICE NOTES

 

1. Delegation of powers and duties to committee, etc.-Where the articles authorise the directors have power to delegate their authority to a committee and a company may adopt Regulation 77 of Table A to Schedule 1.

 

2. Committee meetings.- For transacting business of the company the committee meetings can be conducted in accordance with Regulations 78 to 81 of Table A to Schedule I of the Act or other corresponding provisions of the company's articles.

 

3. Quorum of committee meetings.-Where the Board of directors delgate their powers to a committee without any provision as to the committee acting by quorum, then all members of the committee must be present. Re Liverpool Household Stores Association Ltd., (1890) 59 LJ Ch 616.

 

4. Committee may consist of one director only.-It may be noted that a committee may consist of one director only. Re, Fire Proof Doors, (1916) 2 Ch 142.

 

Report and Statement of Auditors as prescribed in Part 11 and

Part III of Schedule 11 to the Act

 

S. 60 and Sch. II-Report and Statement of Auditors as prescribed in Part II and Part III of Schedule Il to the Act-Board Resolution

 

"RESOLVED that Report and statement of Auditors as prescribed in Part I and Part III of Schedule 11 to the Act received from them be and are hereby noted for inclusion in the prospectus of the proposed public issue."

 

PRACTICE NOTES

 

1. Period for which report and statement of auditors should relate.-The report and statement of the Auditors prescribed in Part 11 and III of Schedule 11 which form part of the prospectus shall relate to the accounts finalised for five financial year immediately preceding the issue of prospectus and ending on a date three months before the issue of the prospectus.

 

2. Where business carried on for less than rive years.-In case the business of a company had been carried on for less than five years Report of the Auditors shall relate to financial years during the period in which the business had been carried on and ending on a date three months before the issue of the prospectus or upto a period not earlier than six months before issue of the prospectus if the accounts of the latest years are not finalised during the said period of six months before the issue of the prospectus.

 

Approval of prospectus

 

S. 60-Approval of prospectus-Board Resolution

 

"RESOLVED that the draft prospectus with the annexures thereto as required under section 60 of the Companies Act, 1956, in respect of which acknowledgement card has been issued by SEBI on ….. placed before the Board, duly initialed by the Chairman for the pur­poses of identification be and is hereby approved and adopted as the prospectus of the company for the proposed public issue of 10,00,000 equity shares of Rs. 15/- each for cash at par.

 

RESOLVED FURTHER that the engrossment of the draft prospectus with the annexures thereto as aforesaid be signed by all the Directors present at the meeting and the same be sent to other Directors not present at the meeting for their signatures.

 

RESOLVED FURTHER that the engrossment of the prospectus with annexures thereto when signed by all the Directors be filed with the Registrar of Companies, NCT of Delhi and Haryana.

 

RESOLVED FURTHER that Mr. LMN be and is hereby authorised to file the prospectus with the annexures thereto with the Registrar of Companies, NCT of Delhi and Haryana and to make, sign and initial any corrections/alterations etc. If any, therein as he may deem necessary for the purpose.

 

RESOLVED FURTHER that the draft of the power of attorney to be given by the company in favour of Mr. LMN for the purpose of registering the prospectus and for making any corrections/ alterations etc. therein, placed before the meeting and duly initialed by the Chairman for purposes of identification, be and is hereby approved.

 

RESOLVED FURTHER that the common seal of the company be affixed to the said power of attorney in the manner provided by article 65 of the Articles of Association of the company.

 

RESOLVED FURTHER that the Secretary of the company be and is hereby authorised to circulate and advertise such prospectus and send sufficient number of copies of the application together with the prospectus to the Manager for issue for sending to the brokers, underwriters, bankers and all others as per the scheme of offer to public approved by the Board."

 

PRACTICE NOTES

 

1. Prospectus to comply with requirement of sections 55 to 68.-Ensure that the prospectus complies with the requirements of sections 55 to 68 of the Companies Act, 1956 relating to prospectus.

 

2. First issue by new companies.- A new company will be defined as one which has not completed 12 months of commercial operations and its audited operative results are not available. Such a new company can make a public issue of equity shares or any security convertible at later date into equity share capital provided a financial institution or a scheduled commercial has appraised the project to the financed through the proposed offer to the public and not less than 10% of the project cost is financed by the said appraising bank or institution by way of loan, equity, participation in the issue of security in the proposed issue or combination of any of them. They will be permitted to issue capital to public either at par or at a premium.

 

3. Filing of draft prospectus with SEBI.-A draft prospectus containing the disclosures should be filed with Securities and Exchange Board of India before a public issue is made. Such filing should be made at least 21 days prior to the filing of the prospectus with the Registrar of Companies.

 

4. No private placement to be solicited from un-related investors.-No private placement of the promoters' share shall be made by solicitation of share contribution from un-related investors through any kind of market intermediaries. The shares of the above companies can be listed on either the Over the Counter Exchange of India or any other stock exchanges.

 

5. Issue by existing listed companies.-Companies wishing to enhance their foreign shareholding upto 51 per cent or more as permissible under the relevant guidelines of Government/Reserve Bank of India can make issues at the price determined by the shareholders in special resolution passed under section 81(1-A) of the Companies Act, 1956. This will also apply to issue of shares to foreign investors by closely-held companies and also by other companies where there is no foreign shareholding at present.

 

6. Underwriting.-Underwriting, though not mandatory, should be only for issue to the public which will exclude reserved/preferential allotment to reserved categories.

 

7. New Financial Instruments.-In regard to new financial instruments, whether issued by way of rights or otherwise, the disclosure requirements shall be filed with SEBI. The debt instruments irrespective of their period of maturity will require credit rating. For issue of debt security of Rs. 100 crores or more two ratings from two different credit rating agencies should be obtained.

 

8. Prospectus not to be issued more than 90 days after riling with Registrar.-No prospectus shall be issued more than 90 days after it had been filed with the Registrar of Companies concerned.

 

9. Penalty for default.-If a prospectus is issued without a copy thereof being delivered under section 60 to the Registrar of Companies or without the copy so delivered having endorsed thereon or attached thereto the required consent or documents, the company, and every person who is knowingly a party to the issue of the prospectus will be punishable with fine of Rs. 50,000/-.

 

Approval of prospectus

(Another format)

 

S. 60-Approval of prospectus-Board Resolution

 

"RESOLVED that the draft of the prospectus offering     Eq­uity shares of Rs. 10/- cash at par of an aggregate value of Rs……. ........... to the public prepared by the company in consultation with the Lead Managers and vetted by SEBI vide their Acknowledgement Card No .   be and is hereby approved and that two copies thereof be got duly signed by all the directors of the company named therein and/or by duly constituted attorneys ap­pointed by the directors.

 

RESOLVED FURTHER that Shri ……. be and is hereby directed to deliver a duly signed copy of the prospectus along with all documents and the memorandum containing salient features to the Registrar of Companies ……… for registration. RESOLVED FURTHER that the Power of Attorney, draft whereof placed on the Table and initialed by Chairman for purposes of identification authorising Company Secretary to make minor corrections, omissions and alterations in the prospectus as may be required by the Registrar of Companies and to obtain certificate of registration of prospectus be and is approved and the same be signed by the Managing Director."

 

PRACTICE NOTES

 

1. Approval of Draft Prospectus.-The draft of prospectus is to be got approved from the Financial Institutions which have sanctioned loan and have agreed to underwrite the shares.

 

2. Informal consent to be obtained from Registrar of Companies.-Forward the draft of the prospectus to the Registrar of Companies concerned and obtain his informal consent in advance.

 

3. Furnishing of draft prospectus to the Stock Exchange.-Forward the draft of the prospectus to the Stock Exchange concerned and its comments, if any, be incorporated in the prospectus.

 

4. Appointment of Merchant Bankers/Lead Managers.-Obtain approval of the Board for the appointment of one or more Merchant Bankers/Lead Manager to the issue in accordance with the norms fixed in SEB1 (DIP) Guidelines, 2000 and enter into a Memorandum of Understanding with them as per Schedule I of the said SEBI Guidelines.

 

5. Filing with SEBI.-After incorporating all the additions/modifications, if any, suggested on preliminary scrutiny, the Lead Manager is to forward the draft prospectus to SEBI with Due Diligence Certificate and other annexures. This should be done at least twenty-one days before the date on which it is proposed to be delivered to the Registrar.

 

6. Share application form to accompany abridged prospectus.-The share application form is to be accompanied by a memorandum containing salient features of the prospectus as per Form No. 2A and must contain the disclosure specified under section I & 11 of Chapter VI of SEBI (DIP) Guidelines, 2000.

 

7. Printing two application forms with abridged prospectus.-In order to save cost the Government has accepted the suggestion and it is now open to the companies and their Merchant Bankers to print two application forms accompanying the abridged prospectus being attached to it alongwith perforated line bearing separate printed numbers. However care should be taken that the abridged prospectus is printed in such a way that it is easily readable at least in point 7 size with proper spacing.

 

8. Undertaking to accompany prospectus.-The prospectus to be sent to SEBI should accompany:

 

(1)        An undertaking from the Chief Executive that complaints, if any, received in respect of the proposed issue would be attended expeditiously and satisfactorily;

(2)        An undertaking from the secretary that he will get the shares listed within the prescribed time period and will also take necessary steps in time for the purpose;

(3)        An undertaking to the effect that the funds will be made available to the Regis­trars to the Issue for despatching refund/allotment letters/certificates by registered post;

(4)        An undertaking from the company that promoters contribution will be brought in full wherever required in advance before issue opens for public subscription and the balance if any, shall be brought in pro rata basis before the calls are made on public;

(5)        An undertaking that the certificates of the securities refund orders to nonresident Indians shall be despatched within specified time.;

(6)        An undertaking that no further issue of securities shall be made till the securities offered are listed or till the application moneys are refunded on account of non-listing, undersubscription, etc.;

(7) Announcement in newspaper about prospectus.-The announcement shall contain the following information:

 

(1) Object of issue.

(2) Project cost.

(3) Means of Financing.

(4) Historical background.

(5) Management structure.

(6) Listing proposal.

(7) Minimum subscription.

(8) Opening, closing, etc.

(9) Details of issue.

(10) Schedule of implementation of project.

(11) Marketing and Selling arrangement.

(12) Future projections.

(13) Justification for premium.

(14) Risk factors and management perceptions.

(15) Financial Institutions/Banks/Underwriters/Brokers.

 

9. Time for receipt of minimum subscription.-If the company does not receive the minimum subscription of 90 per cent of the net offer to public including devolvement amount from underwriters within 60 days of the date of closure of the issue the company shall refund the entire subscription amount received without interest. If there is delay in refund of the amount beyond 8 days after the company becomes liable to pay the amount the company shall pay the amount with interest prescribed under section 73 of the Companies Act, 1956. This requirement of receipt of 90% minimum subscription is not mandatory in case of offer for sale of securities.

 

Underwriting Contracts

 

S. 60-Underwriting Contracts-Board Resolution

 

"RESOLVED that underwriting contracts entered into between the company and financial institutions, bankers and brokers who have consented to underwrite …….. equity shares of Rs. ......................... each to be offered to public at par as per letters ex­changed between the company and them (said letters place/before the meeting and initialed by the Chairman of the meeting) be and are hereby approved.

 

FURTHER RESOLVED that the said financial institutions, bankers and brokers whose names are mentioned hereunder be and are hereby appointed underwriters to the public issue on payment of underwriting commission @ ………….. on the nominal value of shares so un­derwritten by each of them:

 

Name of underwriter                 Nominal value of

                                                            shares to be underwritten

 

 

FURTHER RESOLVED that the draft of the Agreement to be entered into between the company and underwriters (Placed before the Meeting and initialed by the Chairman) be and is hereby approved and the Managing Director of the company be and is hereby authorised to enter into Agreements with the said underwriters."

 

PRACTICE NOTES

 

1. Underwriting made optional.-To reduce the cost of issue it has also been decided that the issuers have the option to decide whether the issue is to be underwritten or not. However, if the issue is not underwritten and if the minimum subscription of 90% of the offer to the public is not received on the date of closure of the issue or if the subscription level falls below 90% after the closure of the issue on account of cheques having being returned unpaid or withdrawal of applications, the entire amount received as subscription would have to be refunded in full. If there is a delay beyond 8 days after the company becomes liable to pay the amount, the company shall pay interest as per section 73 of the Companies Act, 1956. The requirement of 90% minimum subscription will not be mandatory in case of offer for sale of securities.

 

2. Agreement with underwriters.-Underwriters are required to enter into a legally binding agreement with the issuer company in terms of SEBI (Underwriters) Rules, 1993 read with SEBI (Underwriters) Regulations, 1993. The Underwriting Agreement should be in the form given in Annexure A to SEBI-RUW Circular No. (93-94), dated 19-11-1993.

 

3. Revocation of underwriting agreement.-An underwriting letter generally authorise the company or persons acting for it, apply in the name of the underwriter or sub-underwriter for the shares in case they fail to apply when called upon to do so. This letter is an authority coupled with interest and, therefore, after acceptance by the promoter is irrevocable. Carmichael's case (1896) 2 Ch 643.

 

4. Disclosure in Balance-sheet.- All sums paid by way of commission, brokerage, etc. to the extent not written off or adjusted, must be shown in the Balance-sheet (vide Schedule VI, under heading "Miscellaneous expenditure).

 

5. Payment of commission.- The commission agreed to be paid should not exceed the rate authorised by the Articles of Association of the company or 5 per cent of the price at which the shares issued (in case of debentures 21/4 per cent) whichever is less.

 

Appointment of Bankers to the Issue

 

Ss. 60 and 69-Appointment of Bankers to the Issue-Board Meeting

 

"RESOLVED that the following Banks and their Branches be and hereby appointed as Bankers to the proposed issue of ......................... Equity Shares of Rs. 10/- each of the Company and an Agreement, the draft which is placed before the meeting be entered with each one of them:

 

(Names of bankers and addresses of Branches)

 

RESOLVED FURTHER that separate Current Account of the company be opened with the said banks in the name and style ……… of …….Equity Public Issue" and the said Banks be advised to receive applications from Indian Public along with amount for the Equity shares applied for by way of cheques, demand drafts, pay or­ders or cash in respect of proposed public issue of Equity shares on and from the opening of subscription list till closure thereof as may be intimated by the company with authority to instruct their collecting branches to receive applications in the aforesaid manner and the said banks and their branches be requested to realise the proceeds of the cheques, demand drafts, pay orders and to credit the same as well as cash received to the said Accounts.

 

RESOLVED FURTHER that the said Banks be requested to collect information about the number of applications and shares applied for as well as the total amount received daily from their collecting Branches and transmit the said information to the company on the same day either on telephone or by Telex/Fax.

 

RESOLVED FURTHER that the said Banks be requested to act on instructions given on behalf of the company jointly by any two of the following persons namely Shri ………. and Shri …………… .................... Shri....................... and Shri .....................

 

PRACTICE NOTES

 

1. Nomination of Collection Centres.-In accordance with the Listing Agreement the company is required to make arrangement for collection of applications at various places. In order to comply with the said requirement and to help the investing public the company has to nominate more than one bank as bankers to the issue. Bankers to the issue should be appointed in all the mandatory collection centres.

 

2. Refund of Excess Money.-The Board by opening separate Bank Account may also authorise encashment of refund orders for excess amounts received or moneys with respect to applications not found in order.

 

3. Stock Invest Instrument.- Necessary authorisation is to be given to the Registrars to the Issue to make the required endorsement in the Stock Invest Instrument after allotment.

 

4. Agreement to be entered.- An agreement should be entered with the banker to the issue by the company, such an agreement should contain apart from other things, the number of centres at which the application and application monies of an issue of a body corporate will be collected from the investors, the time within which the statement regarding the applications and application monies received from the investors investing in an issue of a body corporate will be forwarded to the registrar to an issue or the body corporate, as the case may be and that a daily statement will be sent by the designated controlling branch of the bankers to the issue to the registrar to an issue indicating the number of applications received on that date from the investors investing in the issue of a body corporate, and the amount of application money received.

 

Appointment of Share brokers, Legal Advisers, Auditors and

Consultants

 

S. 60-Appointment of Shareholders, Legal Advisers, Auditors and Consultants-Board Resolution

 

"RESOLVED that the undermentioned persons be and are hereby appointed in respect of the proposed public issue of the company:

 

            (a) Mr .            Legal Adviser

            (b) Mls             Auditors

            (c) M/s             Consultant

            (d) M/s             Brokers to the issue.

 

RESOLVED FURTHER that the consents in writing received from the persons mentioned above conveying their approval for inclusion of their names in the prospectus of the proposed public issue be and is hereby noted."

 

PRACTICE NOTES

 

1. Notice of consents received from various persons named in the prospectus. The Board of Directors at the time of approving the draft of the prospectus of the proposed public issue shall have to ensure the receipt of consents from the various persons named in the prospectus. The consents so received from the various persons named in the prospectus are to be taken on record by the Board.

 

Appointments of Registrars to the Proposed Issue

 

S. 60-Appoint"ients of Registrars to the Proposed Issue-Board Resolution

 

"RESOLVED that who are duly registered with the Securities and Exchange Board of India (SEBI) under SEBI (Regis­trars to an issue and Share Transfer Agents) Regulations, 1993 be and are hereby appointed as Registrars to the proposed issue of ......................... Equity shares of Rs. 10/- each at par of the company.

 

RESOLVED FURTHER that the company enters into the Memorandum of understanding with each one of the said Registrars to the issue as per the drafts placed before the meeting and intialed by the Chairman for the purpose of identification be and are hereby approved and the Managing Director of the Company be authorised to sign the said MOU's on behalf of the company.

 

RESOLVED FURTHER that the letters of appointment, draft whereof placed on the table and initialed by Chairman for the purpose of identification, be and is hereby approved and the Managing Director of the Company be and is hereby authorised to issue the same to.........................          on behalf of the company once the MOUs are signed by each one of them.

 

RESOLVED FURTHER that the consent in writing received from the said Registrars to the proposed issue conveying their approval for inclusion of their names in the prospectus of the proposed public issue be and is hereby noted.

 

RESOLVED FURTHER that the said Registrars to the proposed issue be and are hereby authorised to authenticate endorsements in any of the documents on behalf of the company in respect of the proposed issue of Equity Shares."

 

PRACTICE NOTES

 

1. Responsibility of the Registrars to the Issue.-The Registrars to the Issue must ensure that the statement of applicants to whom the application money is payable due to rejection of applications and/or any excess amount paid are prepared immediately after allotment is made so that the refund is made within the time specified.

 

2. Payment of interest on delayed payment.-If the company fails to refund the money within 8 days of the closing of the subscription list, the company is liable to pay interest on delayed payments.

 

3. Liability of company to pay excess money when arises.-The, liability of the company to pay the money received in excess of the aggregate of the application money under Section 73(2A) arises on the expiry of ten weeks from the date of the closure of the subscription lists and interest of 15% per annum begins to accrue thereon at the end of eight days therefrom. (Raymond Synthetics Ltd. v. Union of India, (1992) 73 Corn Cases 762 (SQ).

 

Convening of Extraordinary General Meeting to approve

modifications

 

Ss. 60 and 171(2)- Convening of Extraordinary General Meeting for approving modifications suggested by FI and S.E.-Board Resolution

 

"RESOLVED that Extraordinary General Meeting of the Members of the company be convened on ……… at by giving shorter notice than 21 days for approving modifications in the prospectus as suggested by the financial institutions and the Stock Exchange."

 

PRACTICE NOTES

 

1. Shareholders giving consent must be furnished with copy of agenda.-In all cases where consent is given for holding a general meeting on shorter notice, whether the consent is given by all the shareholders or 95% or more of them as the case may require, all the shareholders in the register must be furnished with a copy of the agenda of the business to be transacted at the meeting, and in the case of the annual general meeting or any other meeting where the annual accounts and director's report and auditor's report are to be laid, copies of those documents must be sent to all the shareholders as required by Section 219. The obtaining of the consent referred to in sub-section (2) cannot dispense with these requirements.

 

2. Meeting irregularly held cannot be validated by obtaining ex post facto consent.-A meeting already irregularly held cannot be validated by obtaining the consent ex post facto. What is provided by sub-section (2) being a concession, cannot be extended beyond its limits.

 

3. Agreement to agree to shorter notice must relate to specific resolution.-The word 'consent' means that the members have agreed to a shorter notice. It has been held that agreement must relate to the specific resolution or resolutions to be adopted at the meeting and those agreeing must appreciate that they are giving their consent to a short notice. (Pearce Diff & Co. Ltd., (1960) 1 WLR 10 14).

 

4. Subsequent consent obtained from shareholders may validate resolution.-It has been held that where for want of proper or sufficient notice or other defect in procedure a special resolution is not effective, subsequent consent obtained from shareholders holding 95% or more of the paid-up share capital or voting power, as the case may require, will validate the resolution (In re, Parikh Engineering and Body Building Co. Ltd., (1975) 45 Corn Cases 157).

 

5. Public Trustee cannot give consent for shorter notice.-Since the right of a member to give consent for shorter notice under Section 171(2) of the Act is a right exercisable at a meeting of the company, that right cannot be exercised by the public trustee (Deptt. Letter No. 8131 (187B)166 SLV, dated 4-7-1965).

 

Variation of Terms of Contract mentioned in the prospectus

 

S. 61 -Variation of terms of contract mentioned in the prospectus-Board Resolution

 

RESOLVED that pursuant to section 61 and subject to the approval of the company in general meeting the terms of contract mentioned in the prospectus be and are hereby varied to the extent mentioned in the statement placed before the meeting and initialed by the Chairman for the purpose of identification.

 

RESOLVED FURTHER that an Extraordinary General Meeting be convened on ……… at ………to take the approval of, or on authority given by, the shareholders of the company.

 

RESOLVED FURTHER that the Secretary of the company be directed to issue the notice of the said meeting with the relevant explanatory statement as per the drafts approved by the Board at this meeting.

 

PRACTICE NOTES

 

1. General effect.- There is no prohibition against variation of the terms of contracts contained in a prospectus. The 'size' of the issue and its 'objects' as stated in the prospectus are failing within the mischief of section 61 and therefore they require compliance for variation thereof. N. Parthasarthy v. CCI, (1991) 72 Com Cases 651 (SC).

 

2. Change in deployment of issue proceeds.-A change in the scheme of deployment of the issue proceeds as mentioned in the prospectus is a variation in the terms of a contract referred to in the prospectus pursuant to section 6 1. Madan Gopal Jajoo v. Un ion of India, (1996) 85 Com Cases 153 (Del).

 

3. Shifting of registered office before allotment.-Shifting the registered office of the company to another place from that stated in the prospectus even before allotment, when there were only two shareholders who resolved to do so at an emergent meeting is coming within the scope of section 61 in its spirit though not in its letter. Pal-Peugot Ltd., Re, (1997) 89 Com Cases 808 (Del).

 

Offer of shares or Debentures to the public for sale

 

S. 64-Offer of shares or Debentures to the public for sale-Board Resolution

 

WHEREAS the company had offered for sale to the public one lac equity shares of Rs. 10/- each on ……… 2002 by a document deemed to be a prospectus issued by the company; AND WHEREAS the company has got good response from the public and all of the one lac equity shares of Rs. 10/- each have been bought by ……… number of people;

 

NOW, THEREFORE IT IS RESOLVED that one lac of equity shares of Rs. 10/- each be and is hereby allotted to buyers as per the statement placed before the Board and initialed by the Chairman for the purpose of identification.

 

RESOLVED FURTHER that the Secretary of the company be directed to issue allotment letters to these buyers under the common seal of the company and Mr. ABC and Mr. XYZ being directors of the company be authorised to sign the allotment letters along with the Secretary of the company before issue.

 

PRACTICE NOTES

 

1. Deemed prospectus- By section 64(l) where a company allots or agrees to allot any securities of the company with a view to all or any of those securities being offered by the allottees for sale to the public, the document by which the offer for sale to the public is made is deemed to be a prospectus; and until the contrary is proved, an allotment or an agreement to allot shares or debentures is deemed to have been made with a view to them being offered for sale to public, if

 

(a) the offer for sale is made within six months after the allotment or agreement to allot; and

 

(b) at the date when the offer for sale is made the company has not received the whole of the consideration it has agreed to receive for the shares or debentures.

 

2. Minimum subscription-According to the SEBI (DIP) Guidelines, 2000, the requirement of 90% minimum subscription is not mandatory in case of offer for sale of Securities.

 

3. SEBI (DIP) Guidelines, 2000.-The promoters' shareholding after offer for sale shall not be less than 20% of the post-issue capital. In an offer for sale, the entire amount payable on each instrument shall be brought at the time of the application. [Clauses 4.2. 1. and 8.6. 1(vii)].

 

Newspaper advertisement of prospectus

 

S. 66-Newspaper advertisement of prospectus-Board Resolution

 

"RESOLVED that pursuant to the provisions of section 66 read with section 2(36), the prospectus issued by the company be published as a newspaper advertisement without specifying the contents of the memorandum or the signatures thereto or the number of shares subscribed for by them.

 

RESOLVED FURTHER that the Secretary of the Company shall take necessary steps to ensure that the advertisement does appear in the Times of India, The Statesman and the Indian Express in all their editions."

 

PRACTICE NOTES

 

1. Form of publication of prospectus.- There is no form prescribed by the Act or under the rules of the Act for the advertisement which is required to be published in the newspaper under section 66 of the Act. Department of Company Affairs has no doubt devised the form of the advertisement which is short publication of the full prospectus with a view to reduce the cost of advertisement and it has advised all company managements and promoters to adopt that form. (Circular No. 5(13)ICL-V[162, dated 21-5-62). The advertisement should also be as per guidelines issued by SEBI from time to time.

 

2. Time of publication.- The newspaper advertisement of prospectus should be published after a copy of the full prospectus is delivered to the concerned Registrar of Companies for registration.

 

3. Publication in newspaper not mandatory.-Although section 66 of the Act requires a company to publish a prospectus as a newspaper advertisement but the language of the said section is just directory and not mandatory. The said advertisement should specify the contents of the memorandum or the signatories thereto, or the number of shares prescribed for by them.

 

4. Provisions to be administered by SEBI.-New section 55A inserted by the Companies (Second Amendment) 1999 provides that provisions contained in section 66 should be administered by SEBI in case of listed public company and also public companies which purport to be listed.

 

Offering shares or debentures to members of a private company

 

S. 67(3)-Offering shares or debentures to members of a private company Board Resolution

 

"RESOLVED that further issue of shares of Rs. 7.5 crores in the equity share capital of the company consisting of shares of Rs. 5/- each, be made by offering the shares to the members of the company in proportion to the shares held by each one of them and in case any member of the company is not willing to subscribe for the shares so offered, the Board of Directors of the Company shall be at liberty to issue the shares so unsubscribed to such other persons as the Board of Directors may decide, subject to the condition that the Board shall ensure that the number of members of the Company, excluding past and present employees of the company, does not exceed fifty;

 

RESOLVED FURTHER that any member or members of the company who would have applied for additional number of shares shall be allotted additional shares on equitable basis while making offer of unsubscribed shares."

 

PRACTICE NOTES

 

1. Private circulation not prospectus.- As per the provisions section 67(3) offering of shares to exiting shareholders will not constitute offerine, shares to the public.

 

2. Fact relevant.-Where a private company offers shares to the selective persons it cannot be said to be extending an invitation to the public and in all cases the determination of the question of an offer being made to the public depends upon the fact and language of the notice and the particular circumstances of each case, (Rattall Singh v. Moga Transport Co., (1959) 29 Com Cases 165 (Punj)).

 

3. Companies (Amendment) Act, 2000 (w.e.L 13-12-2000).-This Amendment Act has inserted a proviso to sub-section (3) of section 67 making offer of securities to 50 persons or more in a financial year to be regarded as public offer. The said amendment also inserted a new sub-section (3A) allowing SEBI in consultation with RBI to specify the guidelines in respect of offer or invitation made to the public by a public financial institution or non-banking financial companies.

 

 Private Placement of Shares (S. 67)

 

Some companies utilise the services of brokers and other intermediaries for private placement of equity shares, out of promoters' quota or otherwise, insert advertisements in the print media and also mass-mail literature/ material/brochures superscribed by the caption "Confidential/For private circulation only". In such a case the rights of renunciation are floated in the market by the companies themselves, charging unofficial premia from the investing public. Under section 67(3) of the Act, no offer or invitation shall be treated as made to the public, only if the same can be regarded, in all the circumstances

 

(a)        as not being calculated to result, directly or indirectly, in the shares or deben­tures becoming available for Subscription or purchase by persons other than those receiving the offer or invitation; or

(b)        otherwise as being a domestic concern of the persons making and receiving the offer or invitation.

 

Provided nothing contained in this sub-section shall apply In case where the offer or invitation to subscribe for shares or debentures is made to fifty persons or more.

 

In the context of the above provisions of law, such offers cannot be treated as private placement and provisions relatincy to prospectus under the Companies Act, 1956, are applicable. The companies concerned, their promoters and their intermediaries should refrain from making so-called private placement of' shares or collecting unofficial prerma without recording the san-ic, in the books of' account of tile company, and such acts are serious contravctitions of the Companies Act and will invite penal action under the Act by the Government. Marketing of rights of renunciation by a private company is prohibited under section 3(l)(iii)(c) of the Act, as it cannot make any Invitation to the public to subscribe for its shares. [Press Note No. 7/92/; File No. 17-6-92-CL. V., dated 6-7-1992.]

 

Appointment of Banker for handling Refunds where Issue oversubscribed

 

S. 69-0pening of Bank Account for handling the Refunds-Board Resolution

 

WHEREAS the Public and Rights issues of Equity Shares/Debentures have been oversubscribed, and it was necessary to appoint a banker for handling the refunds;

 

AND WHEREAS Letter No . ………dated ………from ………offering their services as refund banker was placed before the Board, and the Board considered the matter of appointment of   (name and ad­dress of the controlling branch) as refund banker;

 

"NOW THREFORE IT IS RESOLVED that a bank account of the Company in the name and style of ……… EQ­UITY/DEBENTURE ISSUE- REFUND ACCOUNT" be opened with ……… (Name and address of controlling branch of the bank) and the said bank be and is hereby authorised to honour cheques/drafts/pay orders drawn or signed mechanically on behalf of the Company by Mr ……………… Managing director of the Company.

 

RESOLVED FURTHER that all instructions concerning the above account be given, severally by any one of the following Directors, namely, Mr ………………. and Mr . ……………… OR jointly by any two of the following officers, narnely, Mr . ……………… Chief Executive ............................. I Financial Controller and Mr ………. Sec­retary of the Company."

 

"RESOLVED FURTHER that refund pay orders exceeding Rs..... (Rupees ………only) be countersigned by any one of  the following persons as authorised signatories namely, Mr. ………........................ Chief Executive, Mr ………………. Financial Con­troller and Mr ………. Secretary of the Company.

 

RESOLVED FURTHER THAT the said refund orders be revalidated after the expiry of the validity period by any two of the following persons as authorised signatories, namely Mr ………. Chief Execu­tive, Mr ………. Financial Controller and Mr .……… , Secretary of the Company.

 

RESOLVED FURTHER THAT the Company do execute the necessary letters of indemnity with respect to payment of refund orders as may be required by the aforesaid bank and the common seal of the Company be affixed to the stamped engrossment of the letter of indemnity in the presence of any two of the following Directors, namely, Mr ………………. Mr ………. and Mr .……… ………  OR any one of the aforementioned Directors and any one of, Mr.............................. Chief Executive, Mr ………. Financial Controller and Mr ……… Secretary of the Company, who shall sign the same in token thereof."

 

PRACTICE NOTES

 

1. Despatch of Refund Orders.-The Registrars to the Issue is entrusted with the exclusive responsibility of despatch of refund orders, and the issuing company is required to make available in advance to the Registrars requisite funds for despatch of refund orders. The issuing company should also ensure that despatch of refund orders of the value of over Rs. 1500/-is made through Registered Post only. Refund orders should be by Account Payee Cheque drawn on Refund Bankers. Refund orders should incorporate the Savings Bank/Current Account Number and the name of the bank branch in which such account is held by the applicant.

 

2. Refund made within ten weeks.-In case of over- subscription of issues refund of excess application money should be made within ten weeks from the date of the closing of the subscription list and if such refund is paid after ten weeks from the date of closing of the subscription list, application money so refunded will be paid along with fifteen per cent per annum.

 

3. Same Bank.- Usually the same Bank or Banks are entrusted the task of handling the application money as well as the refund.

 

4. Penalty for default.-If all moneys received from applicants for shares are not deposited in a scheduled bank till the minimum subscription has been received by the company and if it is not so received within the prescribed time and such moneys are not returned to the applicants within the prescribed time, every promoter, director or other person who is knowingly responsible for such contravention will be punishable with fine of Rs. 50,0001-.

 

Return of Share Application Money

 

S. 69-Return of Share Application Money-Board Resolution

 

"RESOLVED that in view of the minimum subscription not having been reached and pursuant to Section 69(5) of the Companies Act, 1956, the share application money received by the company be refunded to the applicants and the Secretary of the Company be directed to inform the applicants accordingly."

 

PRACTICE NOTES

 

1. Amount of minimum subscription to be mentioned in prospectus.-In a public issue, the prospectus will have to specify the minimum subscription. Unless this figure is received, the company cannot proceed to allot shares. If the Company does not receive the minimum subscription of 90% of the issued amount including devolvement of, underwriters within 120 days from the date of opening of the issue, the company shall forthwith refund the entire subscription amount received.

 

2. Share application money to be kept in separate account.-The share application money received by the company will have to be kept in a separate account until the minimum subscription is received.

 

The requirement of section 69 being a condition precedent to listing, a conditional permission that the company transfer the application money to a separate Bank account was held to be refusal of permission. Goldline Financial Services Ltd. v. Hyderabad Stock Exchange, (2001) 30 SCL 3 1.

 

3. Share application be refunded when minimum subscription not received within 120 days.-If the minimum subscription is not received within 120 days of issue of the prospectus, the share application money is to be refunded forthwith to the applicants without interest.

 

4. Director liable to pay interest when money not refunded within 130 days.-If the share application money is not refunded within 130 days, the Director of the company becomes liable to pay interest at 16% per annum. to the applicants, unless they prove that the default was not due to misconduct or negligence on their part.

 

Return of Share Application money where minimum subscription not received

 

S. 69-Return of money paid on application where minimum subscription not received-Board Resolution

 

"RESOLVED that amount paid on application for shares be and is hereby returned to the applicants paying the same respectively as the minimum subscription stated in the prospectus has not been received.

 

RESOLVED FURTHER that the Secretary of the Company be and is hereby authorised to do all such acts, deeds and things as may be deemed necessary to give effect to this resolution."

 

PRACTICE NOTES

 

1. Requirement as to minimum subscription.-Section 69 prohibits a company from makina allotments pursuant to a public issue of capital unless the amount stated in the prospectus as the minimum subscription has been subscribed and the money payable on application in respect of such shares constituting the minimum subscription has been received by the company within 120 days.

 

2. SEBI Guidelines.-SEBI (Disclosure and Investor Protection) Guidelines, 2000 stipulates 90% of the total public issue and rights issue as minimum subscription. This requirement is modified by SEBI in case of offer for sale of securities, and also for infrastructure companies.

 

 Allotment of Shares (Ss. 70-75)

 

Allotment of a fractional share is not permissible because the share is indivisible.' The allotment of shares as fully paid-up by way of donation to a charitable trust would be invalid.

 

The allotment of shares by a company to a person in lieu of a genuine debt due to him is in perfect compliance of the provisions of section 75(l). The act of handing over cash to the allottee of shares by a company in payment for the shares allotted to him is not necessary for treating the shares as having been allotted for cash. What is required is to ensure that the genuine debt payable by a company is liquidated to the extent of the value of the shares .3 Where the shares are allotted for consideration other than cash the original contract to-ether with a copy thereof duly verified by an affidavit should be sent along with the return of allotment to the Registrar.

 

An agreement to allot shares or an allotment of share is not a transfer of property as the company which allots the shares is not in any sense an owner of the shares which it creates. The agreement will, therefore, be not liable to stamp duty as a conveyance.

 

Where a return of allotment is made and it is otherwise in order, the Registrar cannot inquire into the legal validity of the matters contained in the return, such as allotment made to minors, etc.

 

Allotment of shares

 

Ss. 70-75-Allotment of Shares-Board Resolution

 

"RESOLVED that 10,000 equity shares of Rs. 10/- each in the capital of the company be and are hereby allotted to the applicants as per list placed before the meeting and initialed by the Chairman for the purposes of identification.

 

RESOLVED FURTHER that the Secretary of the company be and is hereby authorised to file the return of allotment pursuant to section 75 of the Companies Act, 1956, with the Registrar of Companies concerned in the prescribed form.

 

RESOLVED FURTHER that the share certificates for the shares allotted as aforesaid be issued to the allottees under the signatures of Shri LMP, Managing Director, Shri LMN, Director and Shri RPM, Secretary of the company and the common sea] of the company be affixed on the share certificates in their presence.

 

RESOLVED FURTHER that a committee of Directors comprising of Sarvashri ABC, LPO and SPM to be called committee for allotment of shares be and is hereby constituted with powers to make allotment of 5,00,000 equity shares of Rs. 10/- each fully paid-up at par/or at a premium of Rs .…….    in accordance with the terms and conditions specified below and to take all such steps and to do all such acts or things as may be necessary in that connection:­

 

(1)        Not more than 100 shares be issued to an applicant.

(2)        If the applicants exceed the number of shares available for allotment, allotment shall be made proportionately."

 

PRACTICE NOTES

 

1. Filing of prospectus or statement in lieu of prospectus with Registrar.-Before making allotment ensure that prospectus or statement in lieu thereof has been filed with the Registrar of Companies concerned at least three days before the date of allotment. If a company acts in contravention of sub-section (1) and (2) of section 70, the company and every director of the company who willfully authorises or permits the contravention will be punishable with fine of upto Rs. 10,000/-

 

2. Filing of return with Registrar.-File return of allotment in Form No. 2 with the Registrar of Companies concerned within thirty days of the allotment.

 

3. Allotment to be against cash received.-Allotment is to be made per share against cash actually received and only shares are to be shown in the return of allotment.

 

4. Allotment of fractional shares.-Allotment of a fractional share is not permissible because the share is indivisible.'

 

5. Shares not to be allotted by way of gift or bonus.-Shares cannot be allotted by way of gift or bonus to the shareholders even though there may be an agreement to this effect between the shareholders and the company. Such an allotment would be ultra vires.

 

6. Allotment of shares as donation to charitable trust.-Any allotment of shares as fully paid-up by way of donation to a charitable trust would be invalid.8

 

7. Allotment in lieu of genuine debt.-The allotment of shares by a company to a person in lieu of a genuine debt due to him is in perfect compliance of the provisions of section 75(t). The act pf handing over cash to the allottee of shares by a company in payment for the shares allotted to him is not necessary for treating the shares as having been allotted for cash. What is required is to ensure that the genuine debt payable by a company Is liquidated to the extent of the value of the shares."

 

8. Agreement to allot shares not transfer of property.-An agreement to allot shares or an allotment of share is not a transfer of property as the company which allots the shares is not in an sense an owner of the shares which it creates. The agreement will, therefore, be not liable to stamp duty as a conveyance.

 

9. Filing of original contract with copy duly verified by affidavit with Registrar-.Where the shares are allotted for consideration other than cash the original contract together with a copy thereof duly verified by an affidavit should be sent along with the return of allotment to the Registrar."

 

10. Registrar not to enquire into legal validity of return.- Where a return of allotment is made and it is otherwise in order, the Registrar cannot inquire into the legal validity of the matters contained in the return, such as allotment made to minors, etc. 172

 

11. Penalty for untrue statement.-Where a statement in lieu of prospectus delivered to the Realstrar of Companies includes any untrue statement, any person who authorised the delivery of it for registration will be punishable with imprisonment for a term of 2 years or with fine of up to Rs. 50,000/- or with both.

 

Fixation of time and date for opening and closing of subscription list

 

S. 72 –Authorisation for fixing time and date of opening and closing of subscription list-Board Resolution

 

"RESOLVED that Shri …….Managing Director of the Com­pany be and is hereby authorised to fix time and date of opening and closing of Subscription List of 10,00,000. Equity shares of Rs. 10/­ each pursuant to prospectus issued by the Company on 10th May,2002. "

 

PRACTICE NOTES

 

1. Date mentioned in the prospectus.-The time and date of opening and closing of subscription list is required to be mentioned in the prospectus as well as in the newspaper advertisement of the extract of the prospectus.

 

2. Reckonin of 5th day.-According to section 72(l) of the Act no allotment can be made until the beginning of the fifth day after that on which the prospectus is first issued. In reckoning­ the fifth day any intervening day which is a public holiday under Negotiable Instrument Act, 1881 should be disregarded.

 

3. Penalty for default.-Validity of an allotment will not be affected by any contravention of the provision of section 72 but in the event of any such contravention, the company and every officer of the company who is in default will be punishable with fine of upto Rs. 50,000/-.

 

Opening of subscription list

 

S. 72-0pening of subscription list-Board Resolution

 

"RESOLVED that the application list for subscription of 10,00,000 equity shares of Rs. 10/- each will open on the commencement of banking hours on the ……. 2002, and will close at theclose of the banking hours on …….            the ……. or earlier at the discretion of the company but not before the close of the banking hours on ……. the

 

PRACTICE NOTES

 

1. Public Holiday.-If the day of opening or closing of the subscription list happens to be a public holiday then such day will be extended to the next day which is not such a holiday.

 

2. Information to Stock Exchanges.-Once the day of opening and closing of subscription list is decided, Stock Exchanges should be informed about it.

 

Opening of subscription lists

 

S. 72-Opening of subscription lists-Board Resolution

 

"RESOLVED that the application list for subscription of 10,00,000 equity shares of Rs. 5/-each be opened on the commencement of banking hours on ……. the ……. 2002, and be closed at the close of the banking hours on ……. the ……. 2002, or earlier at the discretion of the company but not before the close of banking hours on .............. the 2002"

 

PRACTICE NOTES

 

1. In the case of public issue.-Subscription list should be kept open for at least 3, but not more than 10, working days. The public issue made by an infrastructure company satisfying the requirements in clause 2.4.1 (iii) of Chapter 11 of SEBI (DIP) Guidelines, 2000 may be kept open for a maximum period of 21 working days. The period of operation of subscription list of public issue should be disclosed in the prospectus.

 

2. Allotment not to be made until beginning of fifth day or such later time specired in prospectus.-Pursuant to the provisions of sections 72 and 74 of the Companies Act, 1956, and subject to the terms of the agreement with the recognised Stock Exchange with regard to listing of shares, a company offering shares through a prospectus cannot make allotment until the beginning, of the fifth day or the eighth day after that on which the prospectus is first so issued or such later time, if any, as may be specified in the prospectus. Under the listing agreement with recogmsed Stock Exchange, 'subscription list' for shares can be kept open for a maximum period of 21 days with a condition that it should be kept open for at least two days. Letter No. F. 2/SE/74, dated 4-10-1975 issued by the Department of Economic Affairs.

 

3. Allotment to non-residents and foreigners and to foreign companies.-Allotment to non-residents, and foreigners (whether resident or non-resident) or to companies with 51 per cent non-resident interest should be made with Reserve Bank's permission whenever required.

 

4. Application by underwriters not necessary.-An underwriting agreement has to be treated not merely as a guarantee but as an application for allotment of so many shares as Would not be applied by the public, such shares can be allotted to them. A separate application for allotment is, therefore, not required. (Pioneer Company v. Kaithal Cotton & General Ml'//.v Ltd., (1970) 40 Com Cases 562, 564 (P&H)). Under SEBI (DIP) Guidelines, 2000, can underwriter is required to enter into a memorandum of understanding within the issuer company.

 

Opening and closing of subscription list

 

S. 72-0peiling and closing of subscription list-Board Resolution

 

"RESOLVED that pursuant to the provisions of section 72 of tile Companies Act, 1956 and other applicable provisions, if any, the subscription list for issue of ……. shares of Rs . ……. will open at the commencement of banking hours on ......................... the ……. 2002 and will close at the close of the banking hours on ……. 2002 or earlier at the discretion of the Board of Directors but not "earlier than close of the banking hours on .........................

 

FURTHER RESOLVED that Sarvashri ……. And ……......................  Directors of the Company be and are hereby author­ised severally to close the subscription list at the close of the banking hours on ……. the …….2002 provided the issue is subscribed fully by the said date and to extend the date of subscription list as they may deem fit and proper and to do all such acts and things as may be required in the matter."

 

PRACTICE' NOTES

 

1. Opening of subscription list.-If the first issue was by advertisement, time will be counted from the date of the advertisement. If there was any other kind of issue, it has to be determined as to whether such an issue would come, within the words issue generally. If it does so, time will be reckoned from the date of that issue. If there was also a newspaper advertisement in addition, time will run from the date of issue of advertisement.

 

2. Minimum and maximum duration of subscription list.-The subscription list for public issue can be kept open for a minimum period of 3 working days where and for a maximum of 10 working days.

 

3. The right issues.-The right issues should be kept open for at least 30 days and not more than 60 days.

 

Approval of draft letter of allotment of shares

 

S. 72- Approval of draft letter of allotment of shares-Board Resolution

 

"RESOLVED that the draft letter of allotment for the issue of 50,00,000 equity shares of Rs. 10/-each, as placed before the Board and initialed by the Chairman for identification thereof, be and is hereby approved and that such allotment letter be issued to the applicants under the signature of the Managing Director and the Secretary of the Company after affixing Common Seal on then in accordance with the Articles of Association of the Company."

 

PRACTICE NOTES

 

1. Dispensing with letter of allotment.-In a big public issue giving rise to subscription from all corners of India, there is a growing tendency to dispense with the letter of allotment which is really an instrument which intervenes between the application for the Subscription of shares and the issue of shares certificates evidencing the allotment of shares.

 

2. Adjustment of application money.-Where any applicant is allotted lesser number of Equity Shares than applied for, the excess application money paid will -be adjusted towards the allotment money payable on the Equity Shares allotted. If there is still any excess left after the adjustment, as aforesaid, such excess will be refunded to the applicant.

 

3. Application to Stock Exchange before offering securities to public.-The companies are, before making an offer of securities for subscription to the public through a prospectus required to make an application to the stock exchange.

 

4. Responsibility of Registrars- The Registrars to the issue is entrusted with the ex­clusive responsibility of matters relating to despatch of allotment advice, letters of allotment, including providing covering letters, postal journal, payment of consolidated stamp duty, etc.

 

5. Issue of Share Certificate.- Share certificates should be issued within 3 months of the date of the allotment as per section 113 of the Act.

 

6. Allotment within 30 days.-Clause 6.5.1.1 of SEBI (DIP) Guidelines requires allotment of all securities offered to the public to be made within 30 days of the closure of the public issue. If this is not made then the issuer company is required to pay interest @ 15% per annum.

 

Allotment of shares to a single person

 

S. 72-Allotment of shares to a single person-Board Resolution

 

"RESOLVED that 500 equity shares of Rs. 10/-each of the company distinctively numbered from to             inclusively be and are hereby allotted to Shri  …….…….

 

RESOLVED FURTHER that the Secretary of the company be and is hereby authorised to file the prescribed return of allotment with the Registrar of Companies.

 

RESOLVED FURTHER that share certificate No . ……. for the shares allotted as aforesaid be issued to Shri under the signatures of Shri ……. Managing Director, Shri ……. Director and Shri ……. Secretary of the company and the com­mon seal of the company be affixed on the share certificates in their presence."

 

PRACTICE NOTES

 

1. Return of allotment.-Within thirty days of making any allotment of shares, a return of allotment in Form No. 2 should be filed with the Registrar of Companies along with requisite fees as prescribed under Schedule X of the Act.

 

2. Issue of Share Certificates.-Share Certificates for any allotment of shares should be issued within three months of such allotment as per section 113 of the Act. Whenever any issue results in issue of shares in odd lots, the issuer company shall as far as possible issue certificates in the denomination of 1-2--5-10-20-50 shares."

 

Allotment of shares of company in accordance with the scheme of allotment (Another format)

 

S. 72- Allotment of shares-Board Resolution

 

"RESOLVED that 100,00,000 equity shares of Rs. 10/-each be and are hereby allotted to the several applicants whose names and respective share allotments are given in Register of Allotment prepared in accordance with the Scheme of allotment by the company and approved by the Delhi Stock Exchange, submitted to this meeting and initialed by the Chairman for identification.

 

RESOLVED FURTHER that allotment advice and letters of allotment be issued to each allottee, indicating the number of shares allotted and allotment money @ Rs. 2.50 per share payable by each of them on or before 31st July, 2002 and that Industrial Investment Trust Limited, Bombay, Company's Issue House, be and are hereby authorised to issue the allotment advice and letters on behalf of the Company.

 

RESOLVED FURTHER that the Secretary of the company be and is hereby directed to file the Return of Allotment in Form No. 2 to the Companies (Central Government's) General Rules and Forms, 1956."

 

PRACTICE NOTES

 

1. Duties of Registrars to an Issue.-Registrars to an issue is entrusted with the activities in respect of following matters:

 

(i)         Collection of daily figure from bankers to the issue.

(ii)        Expediting despatch of applications, final certificate to the controlling branches.

(iii)       Collection of application along with final certificate and schedule pages from controlling branches of bankers to the issue.

(iv)       Informing stock exchange/SEBI and providing necessary certificates to lead manager on closure of issue.

(v)        Preparing underwriter statement in the event of under subscription and seeking extension from stock exchange for processing

(vi)       Scrutiny of application received from bankers to issue.

(vii)      Numbering of applications and banks schedule and batching them for control purposes.

(viii)      Transcribing information from documents to magnetic media for computer processing

(ix)       Reconciliation of number of applications, securities applied and money received with final certificate received from bank.

(x)        Identify and reject technical faults and multiple application with reference to ..........

(xi)       Preparation of inverse number.

(xii)      Prepare statement for deciding basis of allotment by the company in consultation with the stock exchange.

(xiii)      Finalising basis of allotment after approval of the stock exchange.

(xiv)     Seeking extension of time from SEBI/Ministry of Finance (Stock Exchange Division) if allotment cannot be made within stipulated time.

(xv)      Allotment of shares on the formula devised by stock exchange.

(xvi)     Obtaining certificate from auditors that the allotment has been made as per the basis of allotment.

(xvii)     Preparation of reverse list, list of allottees and non-allottees as per the basis of allotment approved by stock exchange.

(xviii)    Preparation of allotment register-cum-return statement, register of members, index reoister.

(xix)     Preparation of list of brokers to whom brokerage is to be paid.

(xx)      Printing covering letters for despatches share certificates, for refunding application money/stock invest, printing of allotment letter-cum-refund order.

 

(xxi)     Printing postal journal for despatching share certificates or allotment letters and refund orders by registered post.

(xxii)     Printing distribution schedule for submission to stock exchange.

(xxiii)    Preparing share certificates on the computer.

(xxiv)    Preparing register of members and specimen signature cards.

(xxv)    Arranging share certificates in batches for signing by authorised signatories.

(xxvi)    Trimming share certificates and affixing common seal of the company.

(xxvii) Attaching share certificates to covering letters.

(xxviii) Mailing of documents by registered post.

(xxix)    Binding of application forms, application schedule and computer outputs.

(xxx)    Payment of consolidated stamp duty on allotment letters/share or debenture certificates or procuring and affixing stamp of appropriate value.

(xxxi) Issuing call notices for allotment money to allottees.

(xxxii) Issue of duplicate refund order.

(xxxiii) Revalidation of refund orders.

 

2. Stock Invest.-In case of stock invest the Registrars to an issue should do the fol­lowing­

 

(i)         Segregation of stock invest from application and safe custody thereof.

(ii)        Preparation of separate schedule/list of stock invest application.

(iii)       Filling of right hand portion of stock invest in respect of allottees.

(iv)       Lodging stock invest with computerised stock invest statement to collecting banks.

(v)        Cancellation of stock invest in case of non-allottees.

(vi)       Printing of covering letters and despatching of cancelled stock invest to nonallottees.

 

3. Filing of Return of Allotment with Registrar of Companies.-The Return of Allotment is to be filed in Form No. 2 to the Companies (Central Government's) General Rules and Forms, 1956 by Companies having share capital and which make allotment of shares.

 

4. No return of allotment of shares taken by subscribers to Memorandum.-In the case of shares taken by the subscribers to the Memorandum of Association, no return of allotment is to be filed.

 

5. Shares allotted within one month can be included in one return.-Allotment of shares made within the period of one month, can be included in one return.

 

6. Power of Registrar to extend time.-The Registrar of Companies has now been empowered to extend the period by thirty days for filing the return on an application made in that behalf whether before or after the expiry of the period of thirty days prescribed.

 

7. Shares not to be allotted in name of firm or trusts.-Shares should not be allotted in the name of firm or trusts. However shares can be allotted to individual trustees. In other words, shares can be allotted to individual, companies and associations which are registered.

 

8. Where cash not received allotment cannot be shown for cash.-Where cash has not actually been received in respect of any allotment, such allotment can not be shown as having been made for cash.

 

9. Allotment of fully paid shares to minor through natural guardian.- Shares can be allotted to a minor through natural guardian provided they are fully paid-up.

 

10. No return of allotment in case of forfeited shares.-No return of allotment is to be filed for allotment of shares forfeited by the company under the provisions of its articles for non-payment of calls.

 

11. Allotment of shares otherwise than in cash.-In case of shares allotted as fully or partly paid-up otherwise than in cash contracts duly stamped are to be produced before the Registrar of Companies and a copy duly verified is to be filed with the Registrar. It is to be verified by an affidavit on a stamp paper and is to be signed by a responsible officer of the company stating therein that the copy is a true copy of the contract.

 

12. Agreement to allot shares not liable to stamp duty.-To allot shares is not liable to stamp duty as a conveyance.

 

13. Form No. 3 to be stamped if contract reduced in writing.-Form No. 3 should be stamped with the same stamp duty as would have been payable if the contract had been reduced to writing. In case the contract is not in writing then Form 3 indicating therein the particulars prescribed is to be filed with the Registrar within thirty days of allotment. The contract is to be dated either earlier to the date of allotment or is to be dated on the date of allotment. A contract which is dated after the date of allotment shall be an invalid contract.

 

14. Allotment to nominees.-In case where shares are allotted to the nominee(s) of the parties to the contract in pursuance of any letter received by the company, copies of such letters are to be filed duly verified by an affidavit by a responsible officer of the company.

 

15. Allotment of shares at discount/bonus.-The same form is to be filed when shares are allotted at a discount or bonus shares are issued. Where shares are allotted at a discount, a copy of the resolution authorising such issue together with copy of the order of the Company Law Board sanctioning the issue and where the discount exceeds ten per cent, the order of the Central Government should also be filed along with the return.

 

16. Resolution to be attached with return in case of bonus issue.-In the case of bonus issue a copy of the resolution is also to be attached with the return.

 

17. No allotment of shares unless minimum subscription received.-Section 69 prohibits a company from making allotments pursuant to a public issue of capital unless the amount stated in the prospectus as the minimum subscription has been subscribed and the money payable on application in respect of such shares constituting the minimum subscription has been received by the company within 120 days.

 

18. SEBI (DIP) Guidelines, 2000 and minimum subscription.-If the company does not receive the minimum subscription amount of 90% of the issued amount on the date of closure of the issue in a non-underwritten public issue, or if the subscription level falls below 90% after the closure of issue on account of cheques having being returned unpaid or withdrawal of applications, the company shall forthwith refund the entire subscription amount received. In case of underwritten public issues, if a company does not receive the minimum subscription of 90% of the net offer to public including devolvement of underwriters within 60 days from the date of closure of the issue, the company shall forthwith refund the entire subscription amount received. In both the above cases, if there is delay beyond 8 days after the company becomes liable to pay the amount, the company shall pay interest as per section 73 of the Companies Act, 1956. This requirement of minimum subscription of 90% need not be adhered to in case of offer for sale of securities. The requirement of 90% subscription for issue of capital by an infrastructure company shall not be mandatory, if disclosures are made in the prospectus regal-ding the alternate source of funding.

 

19. Allotment of shares in lieu of genuine debt.-Allotment of shares to a person in lieu of a genuine debt due to him is in perfect compliance of provisions of section 75(l). (Letter No. 8/32/(75)/CL-V, dated 13th March, 1978).

 

20. No allotment of fractional shares.-Fractional shares cannot be allotted as the shares are indivisible.

 

21. Allotment of shares by way of donation not valid.-Allotment of fully paid shares by way of donation to a charitable trust is not valid allotment in law. (Circulat- No. 8150(77)165-CL-V, dated 10th August, 1965).

 

 NRI-Subscription to the Memorandum and Articles of

Association of Indian Companies

 

In order to facilitate formation of new companies, the Reserve Bank of India (RBI) has granted general permission to allow NRIs to subscribe to memorandum and articles of association of new companies as per Notification No. FEMA 20/2000 RB dated 3-5-2000 given under section 6 read with section 47 of the FEMA Act, 1999.

 

Under the said notification the NRI can subscribe to the memorandum of association and articles of association and take up shares of a company for the purpose of incorporation of such company in India and the company to issue shares to such non-resident provided that:

 

1.         The total face value of the shares to be taken up by NRI in the company does not exceed Rs. 10,000/-.

2.         Such a company has obtained a letter of intent/industrial licence/certificate of registration from the Government of India, Ministry of Industry/Director General of Technical Development or any other Central/State Government authority for undertaking its industrial activity in India.

3.         The memorandum of association of such a company does not permit the company to take up any agricultural/plantation activity and/or undertake real estate business, i.e., dealing in land and immovable property for commercial purposes with a view to making profits or derive income therefrom.

4.         Such company files a declaration with the RBI in such form as may be required not later than ninety days from the date of its incorporation giving full particulars of the shares acquired by NRI.

 

An Indian company availing of general permission is required to file a declaration with RBI in Form DIN not later than 90 days from the date of its incorporation, giving full particulars of the shares acquired by NRI.

 

The eligibility of repatriation outside India of the capital invested in the shares purchased in terms of this notification and any income accrued thereon as also of any further investments to be made by non-resident in the shares of such company will be decided by the RBI, while granting permission under section 19(l)(d) of FERA for issue of further shares to NRIs.

 

 Deposits with Public Limited Companies

 

NRIs and OCBs can place funds in fixed deposits of Indian public limited companies including Government undertakings on repatriation basis provided the deposits are made out of remittances from abroad or from their NRE/FCNR account in Indian banks. Such deposits can be accepted by the public limited companies within the limits prescribed under the Companies (Acceptance of Deposits) Rules, 1975 and subject to further limits and conditions as may be prescribed by the RBI as per FEMA (Deposit Regulations) 2000 as amended by Notification No. FEMA 52/RB-2002 dated 1st March, 2002. Such deposits, should be for a period of 3 years and have to be designated in Indian rupees.

 

The deposits can also be accepted on non-repatriation basis subject to the limits prescribed in rules and conditions laid down by RBI. Deposits on non-repatriation basis can be made from NRO account.

 

The application for permission to accept deposits from non-residents with repatriation rights may be made by the Indian company through its bankers to the concerned office of Reserve Bank under whose jurisdiction its Head/Registered Office is situated, giving details of the deposit scheme. It is not necessary for non-resident depositors to seek separate permission from Reserve Bank in this regard. Reserve Bank will grant permission to the bank branch nominated by the company for accepting deposits. While granting permission, Reserve Bank will authorise the branch to allow remittance of interest and maturity proceeds of deposits or credit thereof to the depositor's NRE/FCNR account.

 

 Holdings in Joint Names

 

In cases where the shares are acquired in joint names, the first holder is treated as investor for the purpose of operating the limit of one per cent of paid-up capital of the company. The second or third holder is eligible to invest in the shares/debentures of the same company separately up to I per cent of its paid-up capital in their own respective names as the first holder in joint holdings provided they are purchased in his sole name or as first holder in the case of joint holding.

 

In some cases, NRIs may like (for reasons of succession, survivorship, etc.) to hold~ shares jointly with their close relatives resident in India. RBI will permit such joint holdings with repatriation benefits, provided that

 

(i)         the investment is made by sending remittances from abroad or out of funds held in the overseas investor's NRE/FCNR account;

(ii)        the first holder of the shares is an NRI who actually makes the investment out of his own funds; and

(iii)       the resident holder is closely related to the non-resident investor.

 

Remittances/repatriation of capital/dividend will be allowed only to the non-resident investor, i.e., the first holder. In the event of the resident joint holder inheriting shares, he/she will not be entitled to repatriation benefits.

 

 Facilities for investment by non-resident Indian and overseas corporate bodies-Investments without repatriation benefits

 

Investments without repatriation benefits can be divided into the following categories:

 

1.         Investments in units of Unit Trust of India and Government securities,

2.         Investments in proprietary/partnership concerns,

3.         Direct investment in new issues of Indian companies,

4.         Investments in shares/debentures of companies through stock exchange (Portfolio investment),

5.         Investments in shares of Indian companies by private arrangement,

6.         Investment upto 100% of new issues of Indian companies,

7.         Investment in commercial paper issued by Indian companies.

 

 Investments in proprietary/partnership concerns

 

RBI has granted general permission

 

(i)         to NRIs and OCBs to invest on non-repatriation basis by way of capital contribution in any proprietary or partnership concern in India engaged in any industrial, commercial or trading activity and such NRIs and OCBs and Indian concerns to carry on the above mentioned activities in India;

(ii)        to any proprietary or partnership concern in India to place to the credit of or make payment to or for the credit of any NRI or OCB any sum invested by such NRI or OCB in that proprietary or partnership concern or the income accruing to such person by way of profit on his investments.

 

The aforesaid general permission is subject to fulfillment of the following conditions:

 

(a)        the amount invested is received from NRI or OCB investor either by remittances from abroad through normal banking channels or by transfer of funds held in investor's NRE/FCNR/NRO account maintained with banks;

(b)        the proprietary or partnership concern or the NRI or OCB is not engaged in India in any agricultural/plantation activity or real estate business, i.e., dealing in land and immovable property with a view to earning profit or earning income there from;

(c)        the amount invested and the income accruing on such investment is not eligible for repatriation to any place outside India and is payable only in non-repatriable Indian rupees;

(d)        a declaration in form DIN giving the particulars of the amount invested is to be filed by the proprietary or partnership concern with the Regional Office of the RBI in whose jurisdiction the proprietary or partnership concern is situated within a period of ninety days from the date of receipt of investment.

 

  Direct investment in new issues of Indian companies

 

General permission has been granted to NRIs and OCBs to take up or subscribe to, on non-repatriation basis, shares or convertible debentures issued, whether by public issue or private placement, by a company incorporated in India; and to a company incorporated in India to issue shares/convertible debentures to NRIs/OCBs by way of new/right/bonus issue and to export share/debentures certificates to such NRIs/ OCBs.

 

The general permission is subject to the following conditions:

 

(a)        the investee company does not carry on agricultural/plantation activities and/or real estate business (excluding real estate development i.e., development of property and construction of houses);

(b)        the payment from the shares or convertible debentures issued to such NRIs and OCBs is received by remittances from abroad through normal banking channels or by transfer of funds held in investor's NREIFCNR/NRO account maintained with banks authorised to deal in foreign exchange in India or authorised cooperative/commercial banks in India;

(c)        neither the capital invested nor any income arising therefrom whether by way of capital appreciation or dividend or otherwise is eligible for repatriation out of India at any time;

(d)        all dividend/interest accruals and sale proceeds of shares/convertible debentures (if sold in future) with permission of RBI, wherever necessary, will be credited to the investor's NRO rupee account with a bank authorised to deal in foreign exchange in India;

(e)        the necessary approval of SEBI, if required;

(f)        the company issuing the shares or convertible debentures files a declaration, not later than ninety days from the date of issue, with the Regional Office of the RBI in whose jurisdiction the proprietary or partnership concern is situated in form DIN together with the requisite documents. The companies may also obtain the undertaking about non-repatriation of capital/income from the investors and send a confirmation to that effect to RBI while filing the declaration in form DIN. Where shares or convertible debentures are issued to an OCB, a certificate in the form specified (OAC/ OAC 1) issued by an overseas auditor, chartered accountant or certified Public Accountant, showing the ownership of such OCB should be filed with RBI along with the declaration.

 

It will be in order for companies in India to issue shares (both equity and preference) or convertible debentures to NRIs/OCBs, on no n- repatriation basis by way of new, rights or bonus issue without prior permission of RBI, provided the conditions mentioned in the above paragraph are satisfied.

 

Dividend/interest due to the non-resident shareholder on share/convertible debentures may also be credited by the company concerned to the non-resident investor's NRO account maintained with a bank in India.

 

As a result of the general permissions granted by RBI, authorised dealers and authorised co-operative/commercial banks may permit withdrawal of funds from NRE/FCNR/NRO accounts for making the proposed investments. Authorised dealers or authorised co-operative/commercial banks may also credit the profit or dividend/interest to the non-resident investor's NRO account without prior approval of RBI.

 

Proposal for investment in non-convertible debentures of Indian Companies by NRIs or OCBs on non-repatriation basis will be considered by Reserve Bank on case to case basis and applications for that purpose must be made by Indian companies concerned in from ISD.

 

  Investments in shares/debentures of companies through Stock

Exchange

 

NRIs are freely permitted to invest in shares and debentures of Indian companies through recoanised stock exchanges in India. From 7th August, 1998, Central Govern­ment has allowed NRI/OCB/PIO to invest in unlisted companies under the portfolio investment scheme. However, such investments will have individual investment limits of 101/v of the total paid up equity capital of the company concerned or total paid lip value of each series of convertible debentures both on repatriation and on non-repatriation basis, by all non-resident Indians are subject to on overall ceiling of 24% of the total paid up equity capital of the company or 24% of the total paid-up value of each series of convertible debentures, as the case may be.

 

The permission is subject to the following conditions:

 

(a)        A general body resolution is required for permitting NRIs/OCBs to acquire shares/debentures of a company through stock exchanges in India under portfolio investment scheme. The limit of 24% applies to total purchases of equity shares and convertible debentures through stock exchanges both on repatriation and non-repatriation basis and is monitored through the link offices in Bombay of the designated banks. No such limit has been prescribed for preference shares/non-convertible debentures of Indian companies and Mastershares of UTI which can be purchased without any limit as to quantum and value of investment.

 

(b)        Payments for such investments may be made either by remittance from abroad or from the credit balance in the investor's NRE, FCNR or NRO account.

 

  Investment in shares of Indian companies by private arrangement.

 

In terms of paragraph IOC.2 read with IOD.2 of Foreign Exchange Management Manual (FEMM), NRIs or OCBs may make direct investments in shares of Indian companies on non-repatriation or on repatriation basis without any limit issued whether by public issue or private placement or right issue. For this purpose, NRIs or OCBs have to make an application to RBI in Form NRI or NRC in case of non-repatriation and Form RPC or RPI in case of repatriation and submit the same to the office of RBI under whose jurisdiction the company's head/registered office is situated. Such permission shall also be deemed to be approval under section 6 read with section 47 of FEMA for transfer/registration of the shares in the name of the NRI.

 

 Investment upto 100% of new issue in Indian companies

 

With a view to providing further incentives to NRIs and OCBs for making investments in Indian, existing or new companies engaged/proposing to engage in the following ac­tivities are permitted to issue shares/convertible debentures to NRIs/OCBs on nonrepatriation basis upto 100 per cent of the new issue:

 

(i)         financing of housing development;

(ii)        real estate development i.e., development of property and construction of houses;

(iii)       infrastructure areas such as construction of roads, bridges, etc.;

(iv)       development of township;

(v)        development of serviced plots and construction of built up residential premises; and

(vi)       manufacturing of building materials.

 

Repatriation of original investment in this case is permitted by RBI only after a lock-inperiod of 3 years from the date of issue of the equity shares or convertible debentures. Applications for this purpose should be made to the Central Office of RBI in form ISD(R).

 

 Investment in Commercial Paper (CP) issued by Indian companies

 

NRIs are freely permitted to invest in commercial paper (CP) issued by Indian companies on non-repatriation basis on the following terms and conditions:

 

(i)         Payment for such investment is received only by remittance from abroad or out of funds held in investor's NRE/FCNR/NRO accounts.

(ii)        The maturity proceeds of CP is creditable to the NRO account of the investor, with a bank in India.

(iii)       The Indian company has to submit a statement in form ICP countersigned by the concerned bank within a period of 10 days of the closing of the subscription lift to the concerned office of RBI(ECD).

 

OCBs are not permitted to invest in CPs.

 

 Investments with repatriation benefits

 

Investments with repatriation benefits can be divided into the following categories:

 

1. Investments in units of Unit Trust of India and Government securities.

2. Portfolio investment in shares and debentures.

3. Investment in Indian companies under 100% scheme.

4. Investments in Indian companies under 40% scheme.

 

 Investments in units of Unit Trust of India (UTI) and Government securities

 

General permission has been granted to NRIs for purchase of units of Unit Trust of India, securities of Central/State Government and National Plan/Savings Certificates without any limit as to the amount of investments on repatriation as well as without repatriation benefits, if these are purchased out of remittances from abroad through approved banking channels or, by withdrawals from their NRE/FCNR accounts with banks in India. Dividend/interest income on such investments and sale/maturity proceeds of such securities can be remitted outside India or credited into NRE/FCNR accounts of NRIs in Indian banks if permission is granted by RBI. If investment is made out of an NRO account, repatriation is not allowed.

 

National Savings Certificates (VII Issue) purchased against foreign exchange are provided with 1% additional interest.

 

NRIs are also allowed to invest in bonds issued by public sector undertakings and in mutual funds set up by public sector financial institutions and banks on repatriation basis, provided the concerned undertaking, institution or bank has obtained permission from RBI for investments by NRIs.

 

 Portfolio investment in Shares and Debentures

 

NRIs and OCBs are allowed to make portfolio investments in shares (equity and preference) and debentures (convertible and non-convertible) quoted on stock exchange in

 

India with full benefits of repatriation of capital invested and income earned thereon provided the following conditions are satisfied:

 

1.         The shares or convertible debentures are purchased through a recognised stock exchange, in India at the rates prevailing on the floor of the stock exchange.

2.         The purchase of equity shares/preference shares or convertible debentures in any listed/unlisted Indian company by any single non-resident or investor does not exceed 5% of the total paid-up equity or preference capital/convertible debentures of the company or 5% of the total paid-up value of each series of convertible debentures by it.

3.         The overall ceiling for total investment by NRI is 24% of the total paid-up equity capital of the company concerned and 24% of the total paid up value of each series of convertible debentures, as the case may be. A general body resolution is, however, required for permitting NRIs/OCBs to acquire shares/debentures of such a company through stock exchanges in India under portfolio investment scheme upto 24%. The limit of 24% applies to total purchases of equity shares and convertible debentures through stock exchanges both on repatriation and non-repatriation basis.

4           Payment for such investment is made either by fresh remittances from abroad or out of funds held in the investor's NRE/FCNR account with a bank in India.

 

If an NRI or OCB has already acquired shares in a particular company with repatriation benefits under any of the schemes to the full extent of the permissible limit of 5%, he will not be eligible to acquire any further shares in that company through stock exchanges with repatriation benefits. If he desires to acquire further shares, he may do so on nonrepatriation basis, subject to the overall ceiling of 24%.

 

Earlier for investment by NRIs/OCBs in new issue of shares/convertible debentures of Indian Companies under the 24% scheme with repatriation benefit an application was required to be made by Indian Companies in Form ISD to the Central Office of the RBI. With effect from 27th October, 1998 such an application is no longer required to be made to the RBI as it has granted general permission. Consequently the Indian Companies seeking NRI/OCB investment under 24% scheme will not hereafter require approval from the RBI and Indian Companies satisfying the conditions laid-down in the aforesaid notification may issue shares/convertible debentures to NRIs/OCBs and file a declaration together with the required documents to the concerned Regional Office of the RBI within 30 days from the date of issue of shares/convertible debentures to NRIs/OCBs.

 

In addition to the aforesaid declaration Indian companies are also required to furnish to the regional office of the RBI a report within 30 days from the date of receipt of remittance containing the following particulars:

 

(a)        Name(s) of the foreign investor(s);

(b)        Country of residence or incorporation of the foreign investor(s)

(c)        Amount and date of receipt of remittance and its rupee equivalent.

(d)        Name and address of the authorised dealer in India through whom the remittance has been received.

(e)        In case where the investment has been approved by SIA/FIPB, the number and date of such approval.

 

AD (MA Series) Circular No. 2 dated 8-1-1999 issued by the RBI Exchange Control Department.

 

Portfolio investment by NRIs in non-convertible debentures of Indian companies and Master shares of UTI through stock exchanges is allowed with full benefits of repatriation of capital and income earned thereon without any monetary or quantitative limit on the investment. It is, however, necessary for them to retain Master shares for a minimum period of I year from the date of their registration with UTI.

 

 Enhancement in the limit on investment by NRIs/PI0s/0CBs in Indian Company through portfolio investment.

 

Press Note dated 11th June, 1998 issued by the Department of Economic Affairs, Foreign Trade and Investment Division enhanced individual and aggregate portfolio investment by NRIs/PIOs/OCBs from 1% to 5% and the aggregate limit for all of them, from 5% to 10% of the paid-up equity capital made through Stock Exchanges under portfolio investment scheme. These limits were part of the aggregate ceiling of 24% for all FIIs/NRIs/P1Os/OCBs in the paid-up capital of a company which were allowed to be raised to 30% by Board/general body resolution.

 

In order to provide a greater margin of flexibility for NRI/PIO/OCB investment, Press Note dated 22nd June, 1998 made individual and aggregate ceiling for portfolio investment by NRIs/P1Os/OCBs exclusive of aggregate portfolio investment ceiling for FIIs. The NRI/PIO/OCB aggregate portfolio investment ceilin would now on be 10% of tile paid-up equity capital of a company and FII investment would continue to be subject to a separate aggregate ceiling of 24% / 30% of the paid-up equity capital of a company.

 

By Press Note dated 7th August, 1998 issued by PIB, Government has permitted NRIs/PIOs/OCBs to invest in unlisted companies under the portfolio investment scheme in conformity with the norms and approval procedures applicable to portfolio investment in listed companies under the scheme. This will be subject to the same individual and aggregate investment limits applicable to investments in listed companies as mentioned above.

 

 Investment in new issues of Indian companies under 40% Scheme

 

NRIs/OCBs are permitted under this scheme to make investment on repatriation basis upto 40% in the new issue of shares both equity and preference or convertible debentures of any new or existing company raising capital through public issue by prospectus. The investment could be made only in the companies raising capital for setting up new industrial or manufacturing units or for the expansion or diversification of existing industrial or manufacturing activities.

 

Investment under this scheme could be made in new or existing companies engaged in the following areas of activity:

 

(a) industrial/manufacturing activity

(b) Hospitals (including diagnostic centres)

(c) Hotels with 3, 4 or 5 star rating

(d) Shipping

(e) Development of computer software

(f) Oil exploration services.

 

In case of a new issue by a public limited company other than through prospectus, upto 40% of the new capital issue can be earmarked for NRI subject to a monetary ceiling of Rs. 40 lacs. No monetary ceiling was prescribed for new issues of companies. Investment under this scheme could be made by fresh remittance of foreign exchanges from abroad or out of the balance held in the investor's NRE/FCNR accounts.

 

Earlier for investment by NRIs/OCBs in new issue of shares/convertible debentures of Indian Companies under the 40% scheme with repatriation benefit a application was required to be made by Indian Companies in Form ISD to the Central Office of the RBI. With effect from 27th October, 1998 such an application is no longer required to be made to the RBI as it has granted general permission vide its notification dated 3rd October, 1998, Consequently the Indian Companies seeking NRI/OCB investment under 40% scheme will not hereafter require approval from the RBI and Indian Companies satisfying the conditions laid-down in the aforesaid notification may issue shares/convertible debentures to NRIs/OCBs and file a declaration in Form ISD together with the required documents to the concerned Regional Office of the RBI within 30 days from the date of issue of shares/convertible debentures to NRIs/OCBs.

 

In addition to the aforesaid declaration Indian companies are also required to furnish to the regional office of the RBI a report within 30 days from the date of receipt of remittance containing the following particulars:

 

(a)        Name(s) of the foreign investor(s);

(b)        Country of residence or incorporation of the foreign investor(s)

(c)        Amount and date of receipt of remittance and its rupee equivalent.

(d)        Name and address of the authorised dealer in India through whom the remittance has been received.

(e)        In case where the investment has been approved by SIA/FIPB, the number and date of such approval.

 

AD (MA Series) Circular No. 2 dated 8-1-1999 issued by the RBI Exchange Control Department.

 

 Investments in new issues of companies under 74% Scheme

 

Under this scheme, NRIs/OCBs could invest in certain priority industries in India with repatriation benefits upto 74% in the new issues of shares or convertible debentures of any new or existing company raising capital from the public through prospectus. Investment was also allowed in any other industry provided the investor undertook to export 60% of the output, or, in the case of industries reserved for the small scale sector, 75% of the Output. The investment under this scheme was also permitted in the case of a hospital project as also a hotel project with 3, 4 or 5 star category. Investments under this scheme could be made either by fresh remittance of foreign exchange from abroad or out of the balance held in the investor's NRE/FCNR accounts.

 

  Investments in new issues of companies under 100% Scheme investments in high priority industries

 

With a view to further liberallsing the policy of for investment by NRIs/OCBs, RBI has permitted NRIs/OCBs to invest with full repatriation benefits upto 100% of the issue of equity capital or convertible debentures of a private/public limited company engaged or proposing to engage in high priority industries without requiring them to obtain prior approval of Government of India, provided

 

(i)         the contribution towards investment in equity shares/convertible debentures are received by remittance from abroad or from the investors' NREIFCNR accounts and covers the foreign exchange requirement for import of capital goods. The plant and machinery proposed to be imported must be new and not second hand;

(ii)        the outflow on account of dividend/interest payments is balanced by export earnings over a period of 7 years from the commencement of commercial production i.e., remittance of dividends will have to be covered by the export realisations of the company from export of items, made in years prior to payment of dividend or in the year of payment of dividend. This condition has been subsequently withdrawn for all industries except IS industries engaged in the consumer goods sector;

(iii)       the proposed project is not located within 25 kms. from the periphery of the standard urban limits of a city having a population of more than 10 lakhs according to the 1991 census.

 

The above facility will be available for new investments and for expansion and diversification of existing industrial undertakings. Investment by individual NRIs in partnership firms in India will also be considered.

 

 Investments in other industries

 

NRIs/OCBs are permitted to invest upto 100% equity with full repatriation benefits in the following

 

(i)         All the 35 industries given in Annexure III to Press Note No. 10 (1992 series) dated 24-6-1992;

(ii)        All the industries and items given in the Annexure to Press Note No.2 (1997 series) dated 17-1-1997;

(iii)       All the industries and items given in the Annexure to Press Note No. 14 (1997 series) dated 8-10-1997 as updated by Press Note No. 2 (1998 series) dated 136-1998, Press Note No. 15 (1998 series) dated 17-10-1998 and Press Note No. 1 (1999 series) dated 4-1-1999.

 

Investments in India by NRIs or P10s or OCBs

 

S. 72/6/47 of FEMA-Acquisition of shares/debentures in the company tip to a limit of 24% by NRIs or OCBs-Board Resolution

 

"RESOLVED that subject to the approval of the Reserve Bank of India and/or Central Government under the Foreign Exchange Management Act, 1999 and subject to such other approvals, permissions and sanctions as may be considered necessary and subject to the applicable provisions, if any, of the Companies Act, 1956, and subject to such conditions as may be prescribed by any of the authorities while granting such approvals/permissions/sanctions, and further subject to the approval of the company at a General Meeting the Board of Directors of the Company (hereinafter referred to as "the Board") be and is hereby authorised to allow Foreign Institutional Investors (FIls), NonResident Indians (NRls), Persons of Indian origin (PlOs) and Overseas Corporate Bodies predominantly owned by NRIs (OCBs) to acquire Share s/Debenture s of the Company through direct subscription or through Stock Exchanges in India under Portfolio Investment Scheme, and/or in accordance with other permissible modes subject to the following conditions:

 

(i)         the total purchases by NRIs/OCBs both on repatriation and nonrepatriation basis be within the overall ceiling limit of:

 

(a) 24% of the paid-up Equity Capital of the company;

(b) 24% of the total paid-up value of each series of convertible debentures of the company;

 

(ii)        the total purchases by FIIs both on repatriation and non repatriation basis be within the overall ceiling, limit of 24% of the paid up equity capital of the company to be enhanced up to 30% subject to passing of a special resolution by the general body or 24% of the total paid up value of each series of convertible debenture of the company.

 

(iii)       investment made on repatriation basis by any single Non Resident Investor in the equity/preference shares and convertible debentures of the company should not exceed 10% of the total paid-up equity or preference capital of the company or 10% of the total paid-up value of each series of convertible debentures of the company.

 

RESOLVED FURTHER that the Board of Directors of the company be and is hereby authorised to do all such acts, deeds, matters and things and to execute such documents or writings as may be necessary, proper or expedient for the purpose of giving effect to this resolution and for matters connected therewith or incidental or ancillary thereto."

 

RESOLVED FURTHER that the Secretary be directed to convene an Extraordinary General Meeting for this purpose and issue the notices along with the relevant explanatory statement as per drafts placed before the meeting and approved.

 

PRACTICE NOTES

 

1. General permission by RBI.-For foreign investment made, by Non-Resident Indians and Other Corporate Bodies promoted by NRI on non-repatriable basis, RBI has Given general permission under FEMA.

 

2. Company's duty to file a return.-For foreign Investment made by NRI's, PlOs and OCB's on non-repatriable basis a return is to be filed with the 1~egional Office of the RBI within ninety days of such investment.

 

 Investment by NRI in sick industrial units

 

In order to further liberalise the existing facilities and at the same time encourage the NRIs and OCBs to participate in the revival of sick units, Government has decided to permit NRI and OCB investment on repatriation basis in existing sick companies and have accordingly, laid down the following guidelines:

 

1.         Bulk investment by NRIs and OCBs on private placement basis would be allowed in sick companies.

2.         A company will be considered sick only if a public financial institution or a consortium is already formulating a plan for its rehabilitation/revival or the company is consistently showing losses for the last three years and the market price of the shares is below par for two years and the public financial institutions/banks are satisfied in this regard.

3.         The bulk investment by the NRIs and OCBs can be either in the form of sale of shares to them from existing shareholders or by issue of fresh equity capital.

4.         Investment on repatriation basis up to 100% of the equity capital of the company can be permitted provided a request is made by the Indian company and supported by a special resolution from the shareholders.

5.         Repatriation of original capital brought into India for a sick company will be permitted after a minimum period of five years. The clearance will be given on a case-by-case examination and the future payment liabilities would be specially taken into account while processing these cases.

6.         RBI will adopt normal procedures to satisfy itself that intending NRI or OCB investors are non-residents of Indian origin or corporate entities which are predominantly owned by NRIs.

 

Application for permission for issue or transfer of equity shares to NRIs or OCBs should be made by the concerned sick company in form RSU to the Central Office of RBI together with the particulars and documents specified in the said application form.

 

 General permission by RBI

 

The general pet-mission by RBI enables FIN to:

 

1.         Sell and reallse capital gains on investments made through initial corpus remitted to India.

2.         Subscribe/renounce right offerings of shares.

3.         Invest on all recognised stock exchanges through a designated bank branch.

4.         Appoint a domestic custodian for custody of investments made in India.

5.         Open foreign currency denominated accounts in designated bank. (There can be more than one account in the same branch of the bank, each designated in different foreign currencies, if it is so required by FIIs for operational purposes).

6.         Open special non-resident rupee account to which could be credited all receipts from capital inflow, sales proceeds of shares, dividends and interests.

7.         Transfer sums from foreign currency account to rupee account and vice versa at the market rates of exchange.

8.         Make investments in securities of Indian companies out of the balances in the rupee account.

9.         Transfer repatriable (after tax) proceeds from rupee account(s) to the foreign currency account(s).

10.        Repatriate the capital, capital gains, dividends, interest income, compensation received towards sale/renouncement of right offerings of shares, subject to the designated branch of a bank the custodian being authorised to deduct withholding, tax on capital gains, and to pay such tax and remitting the nett proceeds at the market rates of exchange.

11.        Realster FII's holdings without any further clearance under FEMA.

 

  No lock-in-period for investment by FII

 

There is no lock-in-period for investment by FIL This is in sharp contrast to the guide lines for investment made on repatriation basis. However, the withholding tax of 65% which was since reduced to 30% in the 1993-94 budget on short-term capital gains will act as a strong deterrent to realising of short-term gains by FIIs. Thus, there is an indirect lock-in-period of one year.

 

 Disinvestment by FII

 

Disinvestment will be allowed by FIN only through stock exchanges in India, including the OTC exchange. In exceptional cases, private arrangements for sales may be permitted by SEBI, provided the sale price is not significantly different from stock market quotations, where available.

 

(i)         Income received in respect of securities 10%

(ii)        Income by way of long-term capital gains arising 10% from transfer of securities held for more than 12

            months

(iii)       Income by way of short term capital gains arising 30% from transfer of securities not held for 12 months

 

The rates of income-tax as aforesaid will apply on the gross income without allowing any deduction under sections 29-44C, 57 and Chapter VIA of the Income-tax Act.

 

The tax will be deducted at source.