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CA FINAL LAW BY CA KARTIK IYERCA FINAL LAW BY CA KARTIK IYERCA FINAL LAW BY CA KARTIK IYERCA FINAL LAW BY CA KARTIK IYER

AT ICAI, BKCAT ICAI, BKCAT ICAI, BKCAT ICAI, BKC

DAILY LAW REVISION SCHEDULE FROM 18TH APRIL TO 27TH APRIL 2017

COVERAGE OF THE MOST IMPORTANT CHAPTERS

Date Day Chapters

18/04/2017 Tuesday ACCOUNTS AND AUDIT

19/04/2017 Wednesday DIRECTORS (SEC 149 TO SEC 183)

20/04/2017 Thursday DIRECTORS (SEC 184 TO SEC 205)

21/04/2017 Friday SEBI

22/04/2017 Saturday PMLA + SARFAESI

23/04/2017 Sunday WINDING UP

24/04/2017 Monday PREVENTION OF OPPRESSION AND

MISMANAGEMENT + SCRA

25/04/2017 Tuesday BANKING REGULATION ACT

26/04/2017 Wednesday COMPANIES INCORPORATED OUTSIDE INDIA +

DIVIDEND

27/04/2017 Thursday PRODUCER COMPANIES

“RESPECT THE TRAINING.

HONOUR THE COMMITMENT.

CHERISH THE RESULTS.”

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PREVENTION OF OPPRESSION AND MISMANAGEMENT The Majority Rule Rule of Foss vs. Harbottle The management of companies is based on the majority rule. Basically, almost every question relating to the management of the affairs of the company is required to be decided upon either by a ordinary Resolution or by a Special Resolution of shareholders. This principles of majority rule was first give recognition in the case of Foss vs. Harbottle. In this case, two members of an incorporated company took legal proceedings against the directors of the company charging them guilty of fraudulent acts resulting in loss to the company. They prayed the Court to ask the directors to pay damages to the company for the loss sustained on account of their acts. The company in general meeting, by majority, resolved not to take any action against the directors. The court refused to interfere into the decision of majority. Exceptions to the Rule in Foss vs. Harbottle The aforesaid rule of majority’s supremacy as laid down in Foss vs. Harbottle case, however, does not hold good in all situations. Not only that certain provisions of the Companies Act offer protection to the interest of the minority shareholders but over a period of time quite a few judicial decisions also offers protection to minority where majority rule shall not prevail. The discussion may, therefore, be grouped under two broad heads, viz. Protection at Common Law: It is an established rule enumerated in Foss vs. Harbottle i.e. Majority shall prevail over minority. But there are having certain exceptions to this rule. These are under: a) Where the act complained of is illegal or ultra vires the company; b) Where the act done by the majority constitutes fraud on the minority; c) Where a resolution is passed by a simple majority for any act, which requires special resolution for it to be effective; d) Where the act infringers the personal rights of an individual member; e) Where any act amounts to oppression of minority or mismanagement of the affairs of the company. In all these cases a minority shareholder is entitled to bring an action for a declaration that the resolution complained of is void.

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Case Laws in Prevention of Oppression or Mismanagement

1. Elder v. Elder and Watson Ltd.

Oppression means “The conduct complained of should be at the lowest and involve a feasible

departure from the standards of fair dealing and the violation of the conditions of fair play on which

every shareholder entrusting his money to the Company is entitled to rely.”

2. Bellador Silk Ltd. A member can complain of oppression only in his capacity as a member and not in his capacity as

director or creditor.

3. Sindhri Iron Foundry (P) Ltd. The right to apply under section 397 is not confined to oppressed minority alone. Oppressed majority

also might apply for relief u/s 397.

However, the Delhi high court in the case of Suresh Kumar Sanghi v/s Supreme Motors Ltd. gave a

contrary view.

4. V Sebastean, Dr. V City Hospital (Pvt)Ltd. Where the majority is prevented from protecting itself by controlling the directors at general Body

Meeting then majority becomes artificial minority. Hence they are entitled claim u/s 397 & 398.

5. Thomas Vettom (VJ) v/s Kuttanad Rubber Co.Ltd.

Where the company is honestly managed and directors have taken a bonafide decision, to not declare

dividend but to accumulate available profit into reserves, is not mismanagement. Non declaration of

dividend when it does not lead to devaluation of shares is not an act of mismanagement.

6. Ranjan Dutta v/s Bhola Nath Paper House Ltd. The continuation of directors in their office after the expiry of their term & in fighting amongst them

has been held as an act of mismanagement.

7. Ashok Betelnut Company (P) Ltd vs M.K. Chandrakanth

Continuous losses cannot, by itself, be regarded as oppression.

8. Gnanasambandan v/s Tamilnad Transporters (Coimbators) P.Ltd. If it is not a case of winding up of the company, then relief u/s 397 is not applicable.

9. Rajmundhry Electric Corporation vs V. Nageshwar Rao. If some of the consenting members have subsequent to the presentation of petition withdrawn their

consent, it would not affect the right of the applicant to proceed with the petition.

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Prevention of Oppression & Mismanagement

Section 241

(1) Right to apply by Member (2) CG can suo moto apply if they are of the opinion

(a) Affairs of the company are that {ACBC MP PI}

Conducted in a manner

{PiCi POMS}

- Prejudicial to Public interest

- Prejudicial to Company’s interest

- Prejudicial or Oppressive to him /

any other member’s

(b)

TRIBUNAL

And Such change is not brought about by/

in interest of {CHS}

Creditors include Debentures holders or

any class of Shareholders

AND

By reason of such change

Affairs of the Co. are conducted in a manner prejudicial to –

- Its interest Or

- Its members Or

- Any class of members

Section 244

(1) Members that have right to apply

(a) If the Company has Share Capital

- 100+ members

- 1/10

th

of members

- Member having 10% of issued Share Capital + Applicant must have paid all calls that are due

on their shares

(b) If Company does not have share capital, then Minimum of 1/5

th

of Total no of members

THE TRIBUNAL MAY WAIVE ABOVE REQUIREMENTS

Material change taken place

in the Management/Control of Co.

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Note :

• If 2 or more persons jointly hold the shares then they shall be counted as 1

•

May Having obtained consent may make application to

from rest (in writing)

Section 242: Powers of the Tribunal

(1) Order is passed by Tribunal that

(a) {A C B C MP PT/ POM/ PCI } AND

(b) Facts justify winding up of the Co. but winding up of Co, would unfairly prejudice such

members

(2) Without prejudice to the generality of the powers under sub‐section (1), an order under that

sub‐section may provide for –

(a) the regulation of conduct of affairs of the company in future ;

(b) the purchase of shares or interests of any members of the company by other members

thereof or by the company ;

(c) in the case of a purchase of its shares by the company as aforesaid, the consequent

reduction of its share capital ;

(d) restrictions on the transfer or allotment of the shares of the company ;

(e) the termination, setting aside or modification, of any agreement, howsoever arrived at,

between the company and the managing director, any other director or manager, upon such

terms and conditions as may, in the opinion of the Tribunal, be just and equitable in the

circumstances of the case ;

(f) the termination, setting aside or modification of any agreement between company and any

person other than those referred to in clause (e) :

Provided that no such agreement shall be terminated, set aside or modified except after notice

and after obtaining the consent of the party concerned ;

(g) the setting aside of any transfer, delivery of goods, payment, execution or other act relating to

property made or done by or against the company within three months before the date of the

application under this section, which would, if made or done by or against an individual, be

deemed in his insolvency to be a fraudulent preference ;

(h) removal of the managing director, manager or any of the directors of the company ;

(i) recovery of undue gains made by any managing director, manager or director during the

period of his appointment as such and the manner of utilisation of the recovery including

transfer to Investor Education and Protection Fund or repayment to identifiable victims ;

(j) the manner in which the managing director or manager of the company may be appointed

subsequent to an order removing the existing managing director or manager of the company

made under clause (h);

(k) appointment of such number of persons as directors, who may be required by the Tribunal to

report to the Tribunal on such matters as the Tribunal may direct;

(l) imposition of costs as may be deemed fit by the Tribunal;

(m) any other matter for which, in the opinion of the Tribunal, it is just and equitable that provision

should be made.

TRIBUNAL

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Tribunal

On application from any party to proceedings,

Tribunal may pass order for conduct of the affairs of the company

May order alteration of AOA/ MOA. Co cannot extent beyond

what has been mentioned in the AOA/MOA by Tribunal

Certified copy of the order of the Tribunal within 30 days

Section 243: Termination / Setting aside / Modification {TSM} of an Agreement

(a) It should not give rise to-

o Claims for damages by any person against the Co.

o Compensation for loss of office

o In any other respect

(b) Without the leave of Tribunal no {Man–O–Man} can be appointed as {Man–O–Man} of the

company for a period of 5 yrs after TS the agreement by the Tribunal

{Man – o – man} CG Tribunal

notice of intention has been given reasonable

to apply for leave opportunity to be heard

Company

ROC

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Section 245:

They shall file an application seeking following orders.

1. Restrain the company from committing an act which is ultra vires MOA AOA (Baahar)

2. Restrain the company from committing breach of any provision of MOA AOA (Nahi)

3. Declare a resolution altering the MOA AOA as void. Resolution is passed by suppression of

material faces or obtained by misstatement (Badla)

4. Restrain the company and its directors from acting on such resolution (Kar)

5. Restrain the company to act contrary to the provision of this Act or any other law for the being

in force

6. Restrain the company from taking action country to any resolution passed by the members

7. Claim damages compassion demand and other suitable option from against any FUW (FUW –

Fraudulent, Unlawful, Wrongful Act)

- Requirement for considering application

1) Whether member / depositor is acting in Good faith

2) Whether there is evidence of involvement of any person other than

director / officer on above matter (1-7)

3) Whether cause of action is one which member / depreciation could

peruse in his own right

4) Any evidence of views of member who have no personal interest

5) Whether cause of action yet to Occur

Authorised before it occurs rectified after it occurs

6) Whether cause of action has already occurred

Order shall be binding on:

- Member / deposit

- Auditor

- Expert, Consultant & advisors

Required No Of

(a) Members

Having share capital

o 100 + members Or

o Prescribed % of Total member Or

o Member holding not less than prescribed % of issued share Capital

Not having share capital

1/5th of total no of members

(b) Depositors

o 100+ depositors Or

o Prescribed of total no of depositors Or

o Depositor’s to whom co owes prescribed no of deposits.

TRIBUNAL

Is the application filed frivolous / vexatious? No (Tribunal shall give order)

Yes

Reject

application make

order that

applicant shall

pay max Rs. 1

lakh to opposite

party

P � Public Notice shall be served to all members / depositors.

A � All similar application in any jurisdiction shall be consolidated into a single application. Lead

applicant shall be chosen. If there is no consensus, then Tribunal shall decide.

T � Two class action application for the same cause shall not be allowed.

Defrayed � Cost / Expenses shall be defrayed by the Company or person responsible for any

oppressive act.

Member / Members / Depositor / Depositors

Of the opinion that the management or conduct

of affairs of the Company are conducted in a

method prejudicial to Interest of Company

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WINDING UP - AMENDMENTS

Earlier, Section 540 (Companies Act 1956) / Now, Section 337 (Companies Act 2013)

Officer of the company

(1) Has by False pretense or Fraud, induced any person to give credit to company

(2) With intent to defraud creditors

• Made any gift/transfer of

• Made change on

• Has caused / connivined at levying any execution against

• Has concealed or removed any part of

Penalty:

If any one of above is done then

• Imprisonment - 1 to 3 years

• Fined - 1 to 3 lakhs


Conditions when proper BOA have not been Kept :-

(1) BOA necessary to exhibit & explain transactions & financial position OR

Entries of all Cash Received and all Cash Paid

Have not been kept

(2) Business of dealing in goods

→ Goods sold or purchased

→ Annual stock taking statement

→ Buyers and sellers of goods

Have not been kept

(3) 2 preceding years from Commencement of business OR

From Start of Business

- Every officer in default shall be liable

Imprisonment -- 1 to 3 years

Fine -- 1 to 3 lakhs

- Officer shall not be guilty if he acted honesty and default was excusable

Property

of the

Company

WHICHEVER IS SHORTER

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OCo CreCo Application to

TRIBUNAL


TRIBUNAL

+ or

In the Course of Winding-up, it

appears that the Business of

the Company is carried with:

• Intent to defraud Or

• Fraudulent Purpose • Official Liquidator

• Company Liquidator

• Creditor

• Contributory

Any person who is/has been

{Di M O K}

Shall be personally responsible without any limitation of liability for

all / any debt or liability of the Company

+

Tribunal can give Further Directions like-

• Declaration of a charge on any debt / obligation as liability

• Mortgage / charge / Interest on any assets of the Company

• Further orders as may be necessary

May order

that

P.DiMOC MP �� MaRLiA

+

Guilty of Mis + BT

ko leke bhaag gaya

• Official Liquidator

• Company Liquidator

• Creditor

• Contributory

OCo CreCo Application within 5

years from-

• Date of Winding up

order

• 1st Appointment of

company’s

Liquidator

• MR.MisBT

WHICHEVER IS LONGER

Inquire

P.DiMOC

Order to

repay /

restore MP

To Contribute such

sum to Assets of

the Co. in respect

of MR.MisBT

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SARFAESI : DEFINITIONS OF IMPORTANT TERMS

Financial asset.

under

Sec.2(l)

Securitisation

Section2(z)

Asset

Reconstruction

Company

Section 2(ba)

Asset

Reconstruction

Section 2(b)

Financial asset means debt or receivables and includes-

i. a claim to any debt or receivables , whether secured or unsecured; or

ii. any debt or receivables secured by, mortgage of, or charge on, immovable property; or

iii. a mortgage, charge, hypothecation or pledge of movable property; or

iv. any right or interest in the security,

v. any beneficial interest in property, whether movable or immovable, or in such debt,

receivables, whether such interest is existing, future, accruing, conditional or contingent;

or

va. any beneficial right, title or interest in any tangible asset given on hire or financial lease

or conditional sale or under any other contract which secures the obligation to pay any

unpaid portion of the purchase price of such asset or an obligation incurred or credit

otherwise provided to enable the borrower to acquire such tangible asset; or

vb. any right, title or interest on any intangible asset or licence or assignment of such

intangible asset, which secures the obligation to pay any unpaid portion of the purchase

price of such intangible asset or an obligation incurred or credit otherwise extended to

enable the borrower to acquire such intangible asset or obtain licence of the intangible

asset

vi. any financial assistance

Securitisation means acquisition of financial assets

• by any securitisation company or reconstruction company

• from any originator, whether by raising of funds by such securitisation

company or reconstruction company

• from qualified institutional buyers by issue of security receipts representing

undivided interest in such financial assets or otherwise.

Asset Reconstruction Company means a Company registered with the Reserve Bank

u/s 3 for the purpose of Asset Reconstruction or Securitization.

Asset Reconstruction means

• acquisition by any securitisation company or reconstruction company

• of any right or interest of any bank or financial institution

• in any financial assistance

• for the purpose of realisation of such financial assistance;

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Borrower

Section2(f)

Non-

performing

asset under

Sec.2(o)

Default

Section 2(j)

Borrower means

• any person who has been granted financial assistance

• by any bank or financial institution or

• who has been given any guarantee or has created any mortgage or has

pledge as security;

• has been provided the financial assistance granted by any bank or financial

institution

• and becomes borrower of a securitisation company or reconstruction

company

• consequent upon acquisition by it of any rights or interest of any bank or

financial institution in relation to such financial assistance

Non-performing asset means-

an asset or account of a borrower, which has been classified by a bank or financial

institution as substandard, doubtful or loss asset-

• in case such bank or financial institution is regulated by an authority, constituted

by any law for the time being in force,

in accordance with the guidelines relating to assets classifications issued by such

authority or body;

• in any other case, in accordance with the directions or guidelines relating to

assets classifications issued by the Reserve Bank

Default means

(a) non-payment of any debt or any other amount payable by the borrower to any

secured creditor consequent upon which the account of such borrower is

classified as non-performing asset in the books of account of the secured

creditor; or

(b) non-payment of any debt or any other amount payable by the borrower with

respect to debt securities after notice of ninety days demanding payment of

dues served upon such borrower by the debenture trustee or any other

authority in whose favour security interest is created for the benefit of holders

of such debt securities.

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Qualified

Buyer

Sec. 2(u)

Security receipt

Sec. 2(1)(zg)

Secured Creditor

Sec. 2(zd)

Qualified institutional buyer means

• a financial institution, insurance company, bank, State financial corporation,

State Industrial Development Corporation, trustee or securitisation company or

reconstruction company , which has been granted a certificate of registration

under Section 3 (4) or

• any asset management company making investment on behalf of mutual fund"

or

• a foreign institutional investor registered under the SEBI Act, 1992 or regulations

made thereunder, or

• any other body corporate as may be specified by the Board

Security receipt means a receipt or other security,

issued by a securitisation company or reconstruction company

to any qualified institutional buyer pursuant to a scheme,

evidencing the purchase or acquisition by the holder thereof, of an undivided right, title

or interest in the financial asset involved in securitization

"Secured creditor” means—

(i) any bank or financial institution or any consortium or group of banks or financial

institutions holding any right, title or interest

Upon any tangible asset or intangible asset as specified in clause (l );

(ii) debenture trustee appointed by any bank or financial institution; or

(iii) an asset reconstruction company whether acting as such or managing a trust set

Up by such asset reconstruction company for the securitisation or reconstruction,

as the case may be; or

(iv) debenture trustee registered with the Board appointed by any company for secured

debt securities; or

(v) any other trustee holding securities on behalf of a bank or financial institution,

in whose favour security interest is created by any borrower for due repayment of any

Financial assistance.'

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SARFAESI ACT, 2002

Securitisation and Reconstruction of Financial Asset and Enforcement of Security Interest Act

Eg. IM Asset Reconstruction

Asset Reconstruction Co. (India) Ltd.

Reliance Asset Reconstruction Pvt. Ltd.

Section 3: Procedure for Registration

Application to

Securitisation RBI

Company

may grant may reject it

certification

of Registration Reason + ROBH

+ Following conditions *

{Not

2

Adequate

2

PruCo

2

S}

1. ARC has not incurred losses in any of the 3 preceding financial years.

2. Has directors who are not convicted for offence involving moral + turpitude.

3. Has adequate arrangements for realization of FA acquired for the purpose of securitization.

4. Has directors who have adequate professional experience in matters related to finance, securitization etc.

5. Has complied with or position to comply with prudential norms of RBI.

6. Has complied with conditions specified by RBI for said purpose.

7. Sponsors of ARC is fit & proper person as per criteria issued by RBI.

Note : Prior approval of RBI is required for :

• .Substantial change in management in including appointment of Director in BOD, of ARC or MD or CEO

(like transfer of share, transfer of business, amalgamation)

• Change of location of Registered office

• Change in its name

Section 4 : Cancellation of Certification of Registration

Certification of Registration can be cancelled if:

a. ARC ceases to hold any investment from QIB

Conditions

Net owned

funds

Minimum 2 crores

or

Such higher

amount as the RBI

may notify

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b. Fails to comply RBI direction (however ROBH shall be given)

c. Fails to comply with conditions for which certificate was granted

Notes:

• ARC has to repay with interest, entire investment of QB held by it, within such period as RBI may direct.

• SRC can appeal to CG within 30days from the date of communication of order.

Section 5: Acquisition of Rights or interest in Financial Assets & its effects.

{ L. R A S

2

T }

1) Bank of Financial

Institution is lender ARC shall be deemed to be lender

Of Financial Asset

2) Right of Bank or FI ARC shall have such right

3) All { A B C D G N P O} shall be in favour of SRC

& it can enforce it

4) Any suit, appeal & other proceedings which is pending with bank / FI may be continued prosecuted, enforced

against SRC

5) For purposes of asset reconstruction & securitization if any document shall be executed by bank /FI in favour

of ARC then for such purpose STAMP DUTY IS EXEMPT.

6) Any right, tittle, interest upon any tangible or intangible asset with Bank/FI, shall vest in ARC on such

acquisition of asset.

Section 9: Measures for Asset Reconstruction

{RES

2

T

2

– C}

1) Rescheduling debt payments repayable by borrowings

2) Enforce security interest

3) Settlement of dues payable by borrowers

4) Sale or lease a part or whole of borrower’s business

5) Taking possession of secured assets

6) Take over proper management of borrower’s business by change of management

7) Conversion of any portion of debts into shares of borrower’s company

Note:

• For above action RBI shall provide direction

• ARC shall take measures as per policies and directions of RBI

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Section 13: Enforcement of Secured Interest by Creditor

Borrower Secured

1 Default Creditor The secured creditor can -

in Repayment * Take possession of secured asset

of installments * Takeover the management

* Appoint manager to manage secured assets

* Acquire so much of the money from borrower sufficient to pay

secured debt

Notes

1. Incase of joint financing, atleast 75% of the creditors in value, shall initiate action for it to be binding on

other secured creditors.

2. If dues are not fully paid after civil proceeds, secured creditors may file an application with the Debt

Recovery Tribunal.

Note : If borrower has raised funds through issue of debt securities then it cannot be classified as NPA.

Section 15 : Manner & Effect of takeover of Management

Can appoint director

an administrator

Borrower Secured Creditor

Cannot do the following actions: After taking over mgmt.

- Nominate any person to be director of business of borrower

- Pass resolution at the publish a notice in

- Meeting unless secured Creditor approved English newspaper &

- Continue process of winding up (unless Creditor approves)

newspaper in regional

language

Note : If debts are paid in full than secured creditor shall restore the management of borrower’s business.

Note : If any secured creditor converts part of its debts into shares of a borrower company & acquires

controlling interest , then he shall not be liable to restore the management of the company.

Declare as NPA Non-

compliance

within 60

days

Notice in 60 days

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SEBI Act Management of the Board

Chairman 2 Members (from MoF) 1 member 5 other members

from RBI of which atleast 3 shall

be whole time members

Shall be Shall be Shall be Shall be

appointed nominated nominated appointed

by CG by MoF by RBI by CG

Shall be APPOINTED by SEBI

Chairman & other members shall be

Persons of ability, Integrity Capacity to deal Specialised knowledge or

and Standing with problem relating Experience of Law, Finance,

to securities market Economics, Accountancy, Administration

Or in any other discipline.

• Purpose of the Board � Protect interest of Investor

� Promote development of Securities Market

� Regulate the Security Market

• Objectives :

Issuer Investors Intermediary

Fair dealings 1) Provide degree of 1) Regulate & develop

funds at Protection code of conduct

low cost 2) Safeguard their 2) Make them

rights for steady competitive &

flow of savings in professional.

the market.

Functions of Board Regulate Prohibiting Calling for Info

Stock Intermediaries Self Substantial FUT Insider Undertaking Bank

Exchanges regulatory acquisition practices trading conducting or any

organization of shares & inquiries, other

takeover of Audit of authority

companies Exchanges,

Mutual Funds

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Sec 11A: Board to Regulate or Prohibit issue of Prospectus

SEBI may for protection of Investors

Specify by Regulations By General or special order

the matters relating to

Issue of Transfer Prohibit Specify the

Capital of Securities Company conditions

from Issue subject to

of Prospectus which prospectus

may be issued

Section 11D: SEBI’s power to issue cease/Desist orders & remedies available to company. SEBI has Sec 15T: Securities Appeal Tribunal Sec 15Z: Appeal to Supreme Court

Reasonable grounds to SAT

Believe (RGTB) that Co. May file Give Aggrieved by

has indulged in Appeal ROBH SAT’s order,

Insider Trading or within 45 + pass appeal on any

Market Manipulation days* of order as it question of law

receipt of thinks fit to SC within 60 days*

SEBI’s of date of communication

Can pass Cease Order to of SAT’s order

And Desist order to

Listed Co.

Section 20A of the said Act bars jurisdiction of Civil Court in respect of orders issued by the SEBI.

*Delay is pardonable is reasonable cause for the delay is shown.

Section 12A: Prohibition on manipulation & deceptive practices.

No person shall directly or indirectly indulged in-

MD ED FD

Manipulative or Deceptive Device Employ any scheme or Engage in an act

Device to defraud Which would operate

as fraud on deceit

In connection with dealing in securities which are listed.

Penalty u/s 15HB :- 1 lakh/day or 1 crore

Section 15A: If any person, who is required under this Act or any rules or regulations made thereunder,-

(a) to furnish any document, return or report to the Board, fails to furnish the same,

(b) to file any return or furnish any information books or other documents within the time specified therefore in the

regulations, fails to file return or furnish the same within the time specified therefore in the regulations,

(c) To maintain books of account or records, fails to maintain the same,

Penalty :- 1 lakh/day or 1 crore

Section 15HB : Whoever fails to comply with any provision this Act, the rules or the regulations made or

directions issued by the Board thereunder for which no separate penalty has been provided

He liable to a penalty which shall not be less than one lakh rupees but which may extend to one crore rupees

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Section 15B: Power of SEBI if intermediary fails to enter into an agreement.

Who is required to But fails to

If any person enter into an enter into

Registered as agreement under an agreement

an Intermediary SEBI Act, With his

Rules or Regulations clients

Then he will be liable to penalty of

Rs. 1 crore

OR

1 Lakh per day during which failure continues

Section 15C: Redressal of grievances & remedies available with company. Member has grievances

Company does not redress grievances

within time fixed by SEBI

Hence SEBI penalizes company

Sec. 15D: Penalty for Certain Defaults In case of Mutual Funds

Certificate of

Registration

(Terms & Conditions)

Application for listing

Refund application

Fails to money paid by

investors MF Investment money collected by

collective investment schemes


Section 15E:

Asset management co. fails to comply with Regulations providing restrictions on the activities of the AMC.


Then he will be liable to penalty of -

Rs. 1 crore

OR

1 Lakh per day during which failure continues

If any person, who is Sponsoring or Carrying any

Collective investment scheme, including mutual funds-

(a) Fails to obtain certificate of registration,

(b) fails to comply with the terms and conditions of

certificate of registration,

(c) Fails to make an application for listing ,

(d) fails to refund the application monies paid by the

investors within the period specified in the regulations,

(e) fails to invest money collected by such collective

investment schemes in the manner or within the period

specified in the regulations

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Section 15F: Power of SEBI against default of stock brokers & penalty against such default.

Default for-

Failure to Issue Failure to deliver Charges an amount of

Contract Note in any security or brokerage which is

form & manner failure to make in excess of brokerage

Notified by Stock Exchange payment of specified in

amount due to regulation

investor (in time

& in manner specified

In regulation)

Penalty Penalty Penalty

Not Exceeding the Rs. 1 crore 1 lakh

5 times the amount OR OR

For which contract 1 lakh per day 5 times the amount of

Note was required during which brokerage charged in

to be issued by failure continues excess of specified

broker brokerage

Section 15G: Penalty for Insider Trading

If any insider who,-

{OBBO Deals in SABCo SE BUPSI --- Communicates UPSI --- CaP to deal in SABCo SE BUPSI}

(i) Either on his own behalf or on behalf of any person, deals in securities of a body on any stock exchange on the

basis of any Unpublished Price-Sensitive Information; or

(ii) Communicates any unpublished price-sensitive information to any person, with or without his request for such

information excepts as required in the ordinary course of business or under any law; or

(iii) Counsels, or procures for any other person to deal in any securities of any body corporate on the basis of

unpublished price-sensitive information

Penalty which may extend to-

Rs. 25 crores or

3 Times the amount of profits made out of insider trading

Section 15HA:

• SEBI’S Power against Price Manipulation.

Price Manipulation = { F U T Practices }

Fraudulent Unfair Trade

Penalty

25 crores

OR

3 times profit made with such practices

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SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009

Key Terms:

1. Anchor Investor means a qualified institutional buyer an application for a value of ten crore rupees or more in a public issue made through the book building process in accordance with these regulations.

2. Application Supported by Blocked Amount (ASBA) means an application for subscribing to a public issue or rights issue, along with an authorization to Self‐Certified Syndicate Bank to block the application money in a bank account.

3. Book Building means a process undertaken to elicit demand and to assess the price for determination of the quantum or value of specified securities.

4. Composite issue means an issue of specified securities by a listed issuer on public cum‐ rights basis, wherein the allotment in both public issue and rights issue is proposed to be made simultaneously.

5. Designated Stock Exchange means a recognized stock exchange in which securities of an issuer are listed or proposed to be listed and which is chosen by the issuer as a designated stock exchange for the purpose of a particular issue of specified securities under these regulations

6. Further Public Offer means an offer of specified securities by a listed issuer to the public for subscription and includes an offer for sale of specified securities to the public by any existing holders of such securities in a listed issuer

7. Green Shoe Option means an option of allotting equity shares in excess of the equity shares offered in the public issue as a post‐listing price stabilizing mechanism.

8. Initial public offer means an offer of specified securities by an unlisted issuer to the public for subscription and includes an offer for sale of specified securities to the public by any existing holders of such securities in an unlisted issuer.

IYER PROFESSIONAL ACADEMY CA FINAL LAW by CA KARTIK IYER

IYER PROFESSIONAL ACADEMY @ Andheri, Mumbai 1

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Key Differences Between IPO and FPO 1. Initial Public Offering is a process through which privately owned companies can go public by offering their shares

for sale to general public. Follow‐On Public Offering refers to a process in which publicly owned companies can make further issue of shares to the public through an offer document.

2. IPO is the first public issue of the company’s shares. On the other hand, FPO is the second or third public issue of the shares of the company.

3. IPO is the offering of shares by an unlisted company. However, when a listed company makes the offering it is known as Follow‐on Public Offering.

4. IPO is made with an aim of raising capital through public investment. Unlike FPO, made with an objective of subsequent public investment.

5. IPO are comparatively riskier than FPO. It is because in IPO the individual investor is not known, of what can happen with the company in future, while in the case of FPO, the investor already has an idea about company’s investment and growth prospects.

9. Issue size includes offer through offer document and promoters’ contribution. 10. Net offer to public means an offer of specified securities to the public but does not include reservations. 11. Net worth means the aggregate of the paid up share capital, share premium account, and reserves and surplus

(excluding revaluation reserve) as reduced by the aggregate of miscellaneous expenditure (to the extent not adjusted or written off) and the debit balance of the profit and loss account.

12. Non‐institutional investor means an investor other than a retail individual investor and qualified institutional buyer. 13. Offer document means a red herring prospectus, prospectus or shelf prospectus and information memorandum in terms

of the Companies Act, 2013 in case of a public issue and letter of offer in case of a rights issue. 14. Offer through offer document” means net offer to public and reservations. 15. Preferential issue means an issue of specified securities by a listed issuer to any select person or group of persons on a

private placement basis and does not include an offer of specified securities made through a public issue, rights issue, bonus issue, employee stock option scheme, employee stock purchase scheme or qualified institutions placement or an issue of sweat equity shares or depository receipts issued in a country outside India or foreign securities.

16. Promoter includes: (i) the person or persons who are in control of the issuer; (ii) the person or persons who are instrumental in the formulation of a plan or programme pursuant to which specified securities are offered to public; (iii) the person or persons named in the offer document as promoters.

17. Qualified Buyer means: (i) a mutual fund, venture capital fund, Alternative Investment Fund and foreign venture capital investor registered with the Board; (ii) foreign portfolio investor other than Category III foreign portfolio investor, registered with the Board; (iii) a public financial institution as defined in sec.4A of the Companies Act, 1956; (iv) a scheduled commercial bank; (v) a multilateral and bilateral development financial institution; (vi) a state industrial development corporation; (vii) an insurance company registered with the Insurance Regulatory and Development Authority; (viii) a provident fund with minimum corpus of 25 crore rupees; (ix) a pension fund with minimum corpus of 25 crore rupees; (x) National Investment Fund set up by resolution no. F. No. 2/3/2005‐dated November 23, 2005 of the Government of India published in the Gazette of India; (xi) insurance funds set up and managed by army, navy or air force of the Union of India; (xii) insurance funds set up and managed by the Department of Posts, India

18. Retail Individual Investor means an investor who applies or bids for specified securities for a value of not more than Rs. 2,00,000.



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Regulation 3 ‐ Applicability of the Regulations Unless otherwise provided, these regulations shall apply to the following: (a) a public issue; (b) a rights issue, where the aggregate value of securities offered is Rs.50 lakh or more; (c) a preferential issue; (d) an issue of bonus shares by a listed issuer; (e) a qualified institutions placement by a listed issuer; (f) an issue of Indian Depository Receipts. Regulation 26 ‐ Conditions for initial public offer Conditions for IPO for Unlisted company Satify All 5 conditions Regulation 26(2) Regulation 26(1) OR Go for Book Building Process + Net Tangible Assets ≥ 3 crores in each Preceding 3 full years Issuer should undertake and 50% or less are held as monetary assets. to allot atleast 75% of If more than 50% are held Monetary assets then firm Net offer to Public to QIB commitment have been made to use such excess in project. Net Worth ≥ 1 crore in each of the preceding 3 Full years Proposed Issue + Previous Issue in the same FY ≤ 5 times Of Pre‐Issue Net Worth Average Pre‐tax operating profit ≥ 15 crores in any 3 out of 5 immediately preceding full years. If name is changed within the last 1 year then atleast 50% of revenue for the preceding 1 full year has been earned by the company from activity indicated by the new name. Regulation 26(3) : Company may issue partly convertible debentures / Fully Convertible debentures without making prior public issue of equity shares. Regulation 26 (5) : No issuer shall make IPO if there are convertible outstanding securities or any other right having option to convert into equity shares. However this regulation will not apply if:

1) Conversion price was disclosed earlier in the prospectus of convertible debt instrument. 2) Outstanding employee stock options are granted as per ICAI guidelines note. 3) Fully paid convertible securities are required to be converted on/before filing of RHP (Red Herring Prospectus) /

Prospectus. Regulation 26(4) : Allotment to public issue should be to 1000 + Allottees. Regulation 26(7) : IPO should be graded by one or more credit rating agencies are registered with SEBI. Regulation 25: Public Issuer shall satisfy regulation of this chapter (25, 26 & 27) on the date of filing draft offer document with SEBI & also on the date of registering the offer document with ROC.



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Regulation 4: General conditions Sub‐Regulation (1): Any issuer offering specified securities through a public issue or rights issue shall satisfy the conditions of this Chapter at the time of filing draft offer document with the Board (unless stated otherwise in this Chapter) and at the time of registering or filing the final offer document with the Registrar of Companies or designated stock exchange, as the case may be. Sub‐Regulation (2): No issuer shall make a public issue or rights issue of specified securities: In control of any other company debarred by SEBI

Person Controlli ng Director Promoter Debarred from accessing

Promoter Capital markets by SEBI

Issuer Group d) Application made to atleast one RSE having nationwide terminals. e) Agreement with depository for dematerialization of specified securities. f) Arrangement of finance (for amount other than public issue, right issue or internal accruals) through verifiable means ≥ 75% of stated means of finance.

g) Partly paid shares should be made fully paid shares or forfeited. Sub‐Regulation (3): Warrants may be issued along with public issue or rights issue of specified securities subject to the following: (a) the tenure of such warrants shall not exceed 18months from their date of allotment in the public/rights issue; (b) not more than one warrant shall be attached to one specified security ; (c) the price or conversion formula of the warrants shall be determined upfront and at least 25% of the consideration

amount shall also be received upfront; (d) in case the warrant holder does not exercise the option to take equity shares against any of the warrants held by

him, the consideration paid in respect of such warrant shall be forfeited by the issuer.

Sub‐Regulation (4): The amount for general corporate purposes, as mentioned in objects of the issue in the draft offer document filed with the Board, shall not exceed twenty five per cent of the amount raised by the issuer by issuance of specified securities. Sub‐Regulation (5): No issuer shall make,

a public issue of equity securities, if the issuer or any of its promoters or directors is a wilful defaulter; or b. a public issue of convertible debt instruments if,

i. the issuer or any of its promoters or directors is a wilful defaulter, or ii. it is in default of payment of interest or repayment of principal amount in respect of debt instruments issued by it to the public, if any, for a period of more than six months.

Sub‐Regulation (6): An issuer making a rights issue of specified securities, shall make disclosures as specified in Part G of Schedule VIII, in the offer document and abridged letter of offer, if the issuer or any of its promoters or directors is a wilful defaulter.

Sub‐Regulation (7): In case of a rights issue of specified securities referred to in sub‐regulation (6) above, the promoters or promoter group of the issuer, shall not renounce their rights except to the extent of renunciation within the promoter group.



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Regulation 5 : Merchant Banker 1) Issuer shall appoint Merchant Banker / Merchant Bankers and atleast 1 shall be the lead manager of public issue. 2) Merchant Banker shall appoint intermediaries i.e. share transfer agents, underwriter etc. Regulation 6 : Filing of Offer Document. Filing of offer document by company through merchant banker: • File draft offer document With Fees with SEBI • After 30 days, file offer File a letter of offer with Document with ROC. designated Stock Exchange Regulation 7: Obtain in‐principle approval of RSE IPO FPO / Right Issue From all RSE in which Securities are proposed Specified Specified Specified to be listed Securities Securities Securities listed on Not listed on listed on RSE RSE RSE’s Having Having Having NTT NTT Ntt As well Not having NTT Then from Then from All RSE SE where Then from Securities RSE having are proposed NTT to be listed Regulation 8: Documents to be submitted for public issue to Stock Exchange/s. Regulation 10: Fastrack Issue What is Reference Date ? Reference date is the date on which Red Herring prospectus is filed with the ROC (in case of Book building process) or the date on which prospectus is filed with ROC (in case of fixed price route). FTI is applicable only for listed companies fulfilling all following conditions:

{SEAL GAP} 1) No Show cause Notice or Prosecution initiated or pending from Statutory Authority on the Issuer/Promoter/WTD. 2) Equity Shares of Issuer are listed ≥ 3 years immediately preceding reference date in RSE having NTT. 3) Average market capitalization is atleast Rs. 3000 crores. Average market capitalization is the average of daily market capitalization of public shareholding for period of 1 year upto end of quarter preceding the month in which proposed issue was approved by shareholders. 4) Listing agreement of of Equity have been completed in atleast 3 years immediately preceding the Reference Date. 5) 95% of investor grievances are redressed.



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6) Auditors qualifications are not more than 5% of Net Profit/Net Loss after tax on Audited Accounts in respect of the respective F.Y. 7) Promoter groups shareholding is in dematerialised form. Regulation 11: Opening of an Issue IPO/FPO/Right Issue Fastrack Issue Whether observation Release issue within was issued by SEBI ? time specified u/s 60(4) of companies Act, 1956 i.e. within 3 months If Yes If No Release issue within Release issue within 12 months from the 3 months of said observation 30 days. As per Sec. 60(4) of Companies Act, 1956 Issue is to be opened Within 3 months. Regulation 13: Underwriting Fixed price route Book Building Process If issuer wants, issuer Issuer Appoint (MB) may appoint underwriter (He will also be called as Lead Book Runner) Appoint Underwriter If he fails responsibility goes to Merchant Banker to Underwrite

Regulation 14: If minimum subscription* is not received then refund# entire application. *For listed Company *For other Company 90% of offer through offer document Fulfill the minimum subscription given # In case of Non‐Underwritten issue # In case of underwritten Issue Refund within 15 days Refund within 70 days of closure of Issue (wait 60 Of closure of issue days & last 10 days start refund procedure) Regulation 15: Over subscription cannot be retained by company as per SEBI



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SEBI (ICDR) 2009 (continued)

Regulation 16: Appointment of monitoring agency

1) If issue size> Rs. 500 crores, then company shall appoint a monitoring agency (Financial Institution,

SCB etc) named in offer document.

2) Not Applicable in case of offer for sale.

3) Monitoring Agency is not required to be appointed if regulation 17 is fulfilled.

Regulation 17: Issuer shall ensure that outstanding subscription money is called within 12 months from

The date of allotment of issue. If not, then such shares will be forfeited.

Regulation 17 shall not apply if the Issuer has appointed a Monitoring Agency under Regulation 16.

Regulation 18:

Issuer shall ensure that money received are either allotted shares or money is refunded within 15 days

from closure of issue. If not allotted/ refunded, then interest would be paid by issuer at rate specified in the offer

document.

Regulation 27: Conditions for Public Issue by Listed Company. [F.P.O]

An issuer may make a further public offer if it satisfies the conditions specified in regulation 26(1) (d) and (e) and

if it does not satisfy those conditions, it may make a further public offer if it satisfies the conditions specified in

regulation 26 (2).

Regulation 28: An issuer may determine the price of specified securities, coupon rate and conversion price of

convertible debt instrument in consultation with the lead Merchant Banker or with Book Building Process.

Regulation 29: Differential Pricing

Differential pricing is allowed by SEBI provided the difference shall not be more than 10% at which specified

securities are offered to applicants other than retail investors.

Securities offered to an anchor investor shall not be lower than the price offered to other applicants.

In case of composite issue*, public issue may be different from the price offered in rights issue provided

justification is given regarding differential pricing in the offered document.

Composite Issue = Public Issue + Right Issue.

Regulation 30: Price and Price Band

Fixed Price Route Book Building Route

Price Floor Price No

Price Band Price

Issuer shall announce

Price Band/Floor Price

If IPO, then atleast 5 working days before opening of Bid If FPO, then atleast 1 working day before opening

of Bid

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Note: The cap of the price band shall be < 120% of the floor price.

• Price Band can be revised during the biding period

• However this can be taken either 20% more or 20% less than the current floor price or cap price. If

revised, it has to be widely published through {WAPT} website, ads in newspaper, press release, terminals

of syndicate members.

• Bidding period is usually open for 3 days. However, if revision of price band is done then it can be

extended to 10 days including initial 3 days.

Regulation 31: Face value of Equity shares

If issue price per If issue price per

Equity share is Rs. 500 + Equity share is < 500

Issuer shall have option to determine Face value per equity share is Rs. 10

face value at less than Rs.10/share

Regulation 32: Minimum Promoters Contribution

IPO FPO

Atleast 20% of Post Issue capital 20% of Post 20% of

Issue OR Proposed

Capital Issue

If promoter invest

< 20% then Alternate

Investment funds (AIF)

may invest in shortfall

but only upto 10% of

Post issue capital.

Pricing of excess promoters contribution

In this promoter is looking to take all the advantages himself, So SEBI will have a say on the price at which the

securities will be given to promoters.

Price shall be

1) Issue Price OR 2) Price Determined Under Regulation 76

Whichever is higher

Regulation 76: Preferential Allotment Pricing of Issue

Shares given to someone else other than our own shareholder.

Requires special resolution

If equity shares of the issuer have been listed on RSE for-

26 weeks or more less than 26 weeks

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then then

Higher of Average of weekly high & low of Higher of Average of weekly high &low of

VWAP of related equity VWAP of related equity

Shares quoted in RSE during shares quoted in RSE during

26 weeks 2 weeks The period shares 2 weeks

Preceding Preceding have been listed preceding

Relevant date Relevant date Preceding the the relevant

relevant date date

Whichever is Higher

OR

Issue Price in IPO

OR

Value per share in scheme

Of amalgamation u/s 391

to 394 of Companies Act,1956.

Note 1: If price decided by 2 above price should be recomputed on completion of 6 months based on

the Average of the weekly…….. 26 weeks preceding the relevant date & if such recomputed

price is higher than price paid on allotment, difference will be paid by allottees to the issuer/

promoter.

Note 2: Any preferential issue of specified securities to QIB shall be made at a price not less than

average of the weekly ……… 2 weeks preceding the relevant date.

Payment to be made by promoter

Upto Rs. 100cr, before ` Balance can be

Subscription money paid on pro- rate

received from shareholders basis.

should be deposited in ESCROW A/C

It is an account which someone else will control, who is not a party to the transaction until termination of

transaction.

Note 3: Promoter’s Lock-in period (If promoters have plans to sell the

Shares immediately after listing)

Minimum Promoters Excess Promoters

Contribution contribution

3 years from the date of OR Date of allotment whichever Lock- in for

commercial production is later. 1 year

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(end of month in which

Production starts)

Three exemption from Requirement of Promoters Contribution-

1) Issuer company does not have any identifiable promoter. OR

2) In case of FPO, if equity shares have been listed on SE for at least 3 years and has a track record of

dividend payment for at least 3 immediately preceding years. However, promoters must disclose

their voluntary participation in the proposed issue. OR

3) Rights issue.

Regulation 33 : Securities ineligible for minimum promoters’ contribution.

(1) For the computation of minimum promoters’ contribution, the following specified securities shall not be eligible:

(a) specified securities acquired during the preceding three years, if they are:

(i) acquired for consideration other than cash and revaluation of assets or capitalisation of intangible

assets is involved in such transaction; or

(ii) resulting from a bonus issue by utilisation of revaluation reserves or unrealised profits of the

issuer or from bonus issue against equity shares which are ineligible for minimum promoters’

contribution;

(b) specified securities acquired by promoters during the preceding one year at a price lower than the price

at which specified securities are being offered to public in the initial public offer:

Provided that nothing contained in this clause shall apply:

(i) if promoters pay to the issuer, the difference between the price at which specified securities are

offered in the initial public offer and the price at which the specified securities had been

acquired;

(ii) if such specified securities are acquired in terms of the scheme under sections 391-394 of the

Companies Act, 1956, as approved by a High Court, by promoters in lieu of business and invested

capital that had been in existence for a period of more than one year prior to such approval;

(iii) to an initial public offer by a government company, statutory authority or corporation or any special

purpose vehicle set up by any of them, which is engaged in infrastructure sector;

(c) specified securities allotted to promoters during the preceding one year at a price less than the issue

price, against funds brought in by them during that period, in case of an issuer formed by conversion of

one or more partnership firms, where the partners of the erstwhile partnership firms are the

promoters of the issuer and there is no change in the management:

Provided that specified securities, allotted to promoters against capital existing in such firms for a

period of more than one year on a continuous basis, shall be eligible;

(d) specified securities pledged with any creditor.

(2) Specified securities referred to in clauses (a) and (c) of sub-regulation (1) shall be eligible for the computation of

promoters’ contribution, if such securities are acquired pursuant to a scheme which has been approved under

sections 391-394 of the Companies Act, 1956.

Explanation: For the purposes of clause (b) of sub-regulation (1), the term “infrastructure sector” includes the

facilities or services as specified in Schedule X.

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Bonus Issue (Regulation 92-95)

i) AOA of the company should provide for capitalization of Reserve. If not then special resolution has

to be passed for making provision in the AOA.

ii) If after the issue of bonus shares, paid up share capital is going to exceed the authorized share

capital, then a special resolution has to be passed in GM for the same.

iii) For issuing bonus shares capitalization is allowed only from the following:

a) Free reserves out of the genuine profits.

b) Securities premium collected in cash only.

iv) Bonus should not be paid in lieu of dividend.

v) No default in {PIP FID RED}.

Payment of any interest or principles in respect of its fixed deposit/ interest on debentures / redemption of

debentures.

vi) No default in {P O S D E} i.e. payment of statutory dues of employees.

vii) Conversion of partly paid shares, if outstanding to fully paid shares.

Note 1: Bonus shares cannot be issued unless reservation of bonus shares is made to convertible

debt instruments. – Regulation 93 (1)

Note 2: If Bonus issue is made after board’s approval &

Not requiring shareholders Approval Requiring shareholders Approval

Within 15 days from date Within 2 months from

Of approval of BOD date of Approval of BOD

Bonus shares shall be issued. Bonus shares shall be issued

Note 3: Once decision to make bonus issue is announced then issue cannot be withdrawn.

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Chapter VI A – Condition and Manner of providing existing strategy to Dissenting Shareholders

Why this chapter Who are dissenting Conditions for Exit Price Payable

has been introduced? Shareholders? exit offer shall be higher of:

Incase of change in Those shareholders Public Proposal Amt to be * VWAP paid/

objects or variation in who have voted issue for utilized for payable by

terms of contract against the resolution opened change is object is promoter/

referred to in the of change in objects after 1

st

dissented less than shareholders

prospectus then or variation in terms April by atleast 75% of amt having control

dissenting share- of contract referred 2014 10% of raised or by any

holders should to in the prospectus shareholders (including amt person acting in

get their money who voted in year marked concert with

back GM for general them for

corporate acquisition

purposes) during 52

weeks IPRD

* Highest price

Paid/payable

for any

acquisition

during 26

weeks IPRD

* Volume

Weighted

Average Market

Price of such

Shares for 60

Trading days

IPRD on RSE

where max

volume of

trading is

recorded CIF

frequently

traded

Note:

Relevant date = Date on which BOD approved proposal

of change

Note:

Only those Dissenting Shareholders who are holding

shares as on the relevant date shall be eligible for the

exit offer.

IPRD = Immediately Preceding the Relevant date.

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