Charges, Debentures and Deposits

THE COMPANIES ACT, 2013

IMPORTANT PROVISIONS RELATING TOCHARGES, DEBENTURES AND DEPOSITS

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CS Kalidas Vanjpe Practising Company Secretary

FEATURES

No change in basic concepts.

Emphasis on rules. Objective: to bring flexibility and adoption of

internationally accepted practices, self regulation with more disclosures, stringent punishment for violation etc.


CHARGES Particulars to be filed within 30 days and with

additional fee within three hundred days. CHG 1 for all charges except Deb and CHG9 for deb. Condonation of delay appl in CHG10 for delay beyond 30 days but within 300 days with a declaration that such belated filing will not affect rights of intervening crs. ROC will use his discretion in such case.

If company fails to file within 30 days, the person in whose favour the charge is to be created can apply. ROC should give notice to Co and within 14 days should allow regn unless Co itself applies for regn or shows cause that it shd not be regd.


CHARGES (Contd.) Delay beyond 300 days- appl to CG (CHG 8) In case of satisfaction, particulars to be filed

within 30 days otherwise appl to CG. ROC to give notice to holder to show cause within a period not exceeding 14 days unless he has signed the form

Notice of appt of receiver or manager of property of co-CHG 6


CHARGES (Contd.) ROC may , on evidence that debt has been paid

in full or in part or property has been released from chg or has ceased to be property of the co, enter memorandum of satisfaction, in full or in part, in his register, even without intimation from co. and inform all affected parties within 30 days.

Contravention: minimum penalty for Co- Rs. 1 lakh and maxi 10 lakhs and for OID- imprisonment up to 6 months or mini fine Rs. 25K maxi 1 lakh or both


ISSUE OF SHARES/SECURITIES Sec 23: A public company: A) Public Offer B) Private Placement C) Rights Issue D) Bonus Issue A private company: A) Rights Issue B) Bonus Issue C) Private Placement Section applies to issue of SECURITIES


FURTHER ISSUE OF SHARES Sec 62. Applicable to issue of shares, but

contains certain provisions relating to debentures

Section will not apply if increase in subscribed capital is due to conversion of deb/loan, if such issue of deb/ obtaining loan with the option is approved by a special resolution


CONVERSION OF DEB (Contd.) IF Deb/loan availed from Govt, it can

convert in public interest on reasonable terms.

If not acceptable to Company, it may approach NCLT within 60 days of the order.

If not challenged or appeal dismissed, the order of Govt will take effect and MOA shall stand altered as to increase of Auth cap to that extent.


PROSPECTUS Not much changes in disclosures. Any variations in the terms of the contract

referred to in prospectus or objects for which the prospectus was issued shall be made only with the approval of the members accorded by way of a special resolution.

Notice of meeting in 2 newspapers.


PROSPECTUS (Contd.) Detailed explanatory statement to include: original object total amount raised and utilised, extent of

achievement of the object unutilised amount details of variation reason and justification time limit within which it will be achieved


PROSPECTUS (Contd.) Such cos cannot use such amount for

buying , trading or otherwise dealing in equity shares of any other listed company.

Dissenting shareholders should be given exit offer – terms etc to be decided by SEBI


RIGHTS ISSUE Earlier applicable to public companies.

Now applicable to private also. Liberty to issue shares to anyone at any

time at such price is gone. All conditions like letter of offer,

renunciation etc will apply.


PRIVATE PLACEMENT OF SECURITIES private placement means any offer of

securities or invitation to subscribe securities to a select group of persons by a company (other than by way of public offer) through issue of a private placement offer letter and which satisfies the conditions specified in section 42.

Thus applicable to all securities.


PRIVATE PLACEMENT -REQUIREMENTS Special resolution for each offer. In case of

NCDs, one resolution for all offers in the year sufficient. Explanatory statement to give justification of price

Private placement offer letter List of persons to whom the letter to be

sent No offer to more than 200 persons in a fin

year excl qualified institutional buyers or employees under stock option scheme


REQUIREMENTS (Contd.) Application form serially numbered addressed to

a specific person. form to be sent in writing or electronic form no right of renunciation. Only that person has to

apply and from his own bank a/c Co to file details with ROC including the names of

persons etc. Also SEBI if co. is listed. Co to maintain all records including PAN, Bank

account details


PRIVATE PLACEMENT (Contd.) No fresh offer unless previous offer

completed/withdrawn/abandoned. This is applicable even if earlier offer is for different kind of security.

Minimum investment size Rs. 20,000/- face value.

Separate bank account for application money.

No advt, no distribution channel.


ALLOTMENT No allotment unless minimum amt stated in

prospectus is recd. Mini amt on appl 5% or amt specified by SEBI Time limit 60 days Otherwise refund within next 15 days from the

same account. Delay in refund beyond this period : 12% interest.

Also the amount will be treated as deposit. So penalty under those provisions.

Penalty for contravention of sec 42: Higher of amount involved in the offer or Rs. 2 cr and also refund all money to subscribers


ALLOTMENT (Contd.) Return of Allotment PAS 3- thirty days. complete list of all security holders

containing the full name, address, Permanent Account Number (PAN) and E-mail ID of such security holder, the class of security held, the date of allotment etc.

No benami holding in view of PAN


PREFERNTIAL ISSUE May be issued as further issue of capital. Elaborate disclosures in the expl st e.g. price

band, basis for pricing, relevant date with reference to which price is arrived at , class or classes of persons to whom allotment is proposed to be made, justification for allotment proposed to be made for consideration other than cash, pre and post shareholding pattern etc

also to comply with the conditions in sec 42 i.e. provisions applicable to Private placement. Requirement of issue of PP letter, serially numbered appln and filing of record in PAS4 with ROC will not apply if it is to existing one/more members.


DEBENTURES The Co can issue debentures with an

option to convert into shares, either wholly or partly at the time of redemption. For such issue, special resolution is necessary before issue.

No debentures with voting rights Only secured debentures or compulsorily

convertible debentures can be issued.


SECURED DEBENTURES Secured debentures maximum tenure 10

yrs. But for infra it is 30 yrs Secured by charge on the

assets/properties of the company. Value to be sufficient for repayment of deb and int. (Reason for this rule: Debenturenagar)

Appt of trustee before issue of prospectus or Letter of offer and execution of deed within 60 days of allotment


DEBENTURES (Contd.) Security on specific movable property(no

pledge) or specific immovable property. In case of NBFC, any movable instead of specific property

In case of issue by Govt company, if guaranteed by CG/State govt/combination, no security need to be created.

Charge/mortgage on Holding Co’s property possible for loan by Subsidiary


DEBENTURES (Contd.) If co issues prospectus or makes an offer

or invitation to public or members exceeding 500 in number, prior appointment of debenture trustee is a must. Elaborate rules (excl public offer):

Name to be stated in Letter of offer and all subsequent notices

Their consent to be obtained for appt and the fact needs to be stated


DISQUALIFICATION OF DEB TRUSTEE

(Not applicable to public offer) Beneficial holding of shares Promoter, director, KMP or any officer or

employee of the Co or its holding, subs or asso co Beneficially entitled to money from co other than

their remuneration Indebted to co/its sub/holding/asso co or sub of

such holding co Guarantor for principal debts secured by Deb or

int thereon


DISQUALIFICATION (Contd.) Pecuniary relationship with co of more

than 2% of its gross turnover/income or Rs. 50 lakhs whichever is lower during last two immediately preceding years or current FY

Relative of promoter or any person in employment of the co as Director or KMP


DUTIES OF DEB TRUSTEES (Not applicable to public offer) To satisfy himself that letter of offer should

not contain any matter inconsistent with terms of issue or trust deed

Covenants in Trust deed are not prejudicial to interest of Deb holders

Call for periodical status/performance report from co

Prompt communication to deb holders re default and action taken


DUTIES (Contd.) To appoint Nominee director incase of two

consecutive defaults in payment of interest or creation of security or default in redemption

To ensure that the Co does not commit breach of any terms of issue or covenants of deed and to take reasonable steps to remedy such breach

Inform deb holders about breach Ensure implementation of conditions for creation

of security and redemption reserve


DUTIES (Contd.) Ensure that assets of co and guarantors

are always sufficient and free from encumbrances other than those agreed

To do necessary acts in case security becomes enforceable

Call for reports on funds utilisation Convening meeting of deb holders as and

when necessary


DEBENTURES (Contd.) Trust deed form SH 12 within 3 months from

closure of issue/offer(NA for public offer) Debenture redemption reserve to be created to

the extent of 50% of the amt raised before the redemption starts. To be created out of profits available for distribution as div. In case of partly conv deb, it should be for non-conv portion.

Maintenance of liquid assets of 15% of debentures maturing during the year. Inv by 30th April. This can be used only for redemption and should not fall below 15%


EXEMPTIONS FROM DEB RULES Provisions not applicable to commercial

paper or similar instrument as per RBI guidelines

FCCB or foreign currency bonds issued in accordance with the FCCB and ordinary shares (through depository receipt mechanism) Rules, 1993 or regulations/ directions issued by RBI unless such scheme/regulations/directors provide for it.


DEBENTURES-OTHER PROVISIONS If Trustee comes to conclusion that assets

are insufficient/likely to be insufficient, he can file a petition to tribunal. Tribunal may impose restriction on incurring further liabilities on co

If co fails to redeem or pays interest, Tribunal may order redemption on an appln by deb holder(s)/trustee

Trustees cant be exempted or indemnified for breach of trust or own negligence


DEPOSITS

In private company's definition, the clause of prohibition of invitation or acceptance of deposits from persons other than members, directors or their relatives is gone

Now private companies can accept deposits from Directors under exempted category. Director cannot take loan and place the same as deposit.

They have to comply with the conditions and procedure in case of deposits from members.

The term deposit includes any receipt of money by way of deposit or loan or in any other form by the company but excludes such categories as may be prescribed.


DEPOSITS (Contd.) All cos can accept deposits from members. Limit 25% of the aggregate of the paid up

capital and free reserves*. For companies covered under sec 76, limit is 10%

Period mini 6 m maxi 36 m. To meet short term requirements they can accept deposits of shorter tenure of not less than 3 m. such dep should not exceed 10% of puc and free reserves.

Pvt cos 100% of puc an free reservesCS Kalidas Vanjpe

Practising Company Secretary

DEPOSITS (Contd.) public companies having a net worth of

not less than one hundred crore rupees or a turnover of not less than five hundred crore rupees (eligible companies) can accept deposits from public (sec 76 companies)

Special resolution required. Ordinary resolution will do if aggregate of borrowings do not exceed the aggregate of puc and free reserves


LIMIT ON PUBLIC DEPOSITS Sec 76 cos can borrow up to 10% from

members and 25% from public. For Govt co., the limit is 35%


PROCEDURE Not applicable to private cos Every co to issue a circular to members by

RPAD/Speed post or electronic mode (form DPT1). In addition, advt of circular in two newspapers for sec 76 cos

Credit rating must. In case of adverse change in rating,

depositors to be given exit option Sec 76 co to follow the procedure of advt,

filing the text with ROC etc CS Kalidas Vanjpe

Practising Company Secretary

DEPOSIT INSURANCE Compulsory for all companies (Excl private). Can

be complied by 31.03.16 or availability of product(earlier)

at least thirty days before the issue of circular or advertisement or at least thirty days before the date of renewal. The amount deemed to include principal and int.

maximum cover Rs. 20,000/- Premium to be borne by the Co and cannot be

recovered from depositors


DEPOSIT INSURANCE (Contd.) If defect in insurance due to non payment,

the Co to rectify the defect or enter into a fresh contract within 30 days. If not , the co to repay the deposits and int covered by such insurance within next 15 days. Fi not, int at 15% applicable for period of default and also penal provisions.


SECURITY FOR DEPOSITS Concept of secured deposits introduced. Although the Act makes it optional, the

rules make it compulsory for companies accepting deposits from members, if shortfall in insurance cover.

All companies accepting deposits from members shall create a charge on their assets excl intangible assets to the extent amount remaining unsecured by insurance.


DEPOSITS (Contd.) For sec 76 co., the provisions of creation of

security will apply only in case of secured deposits

In case of deposits which are secured, the amount of such deposits and the interest payable thereon shall not exceed the market value of such assets as assessed by a registered valuer

Security to be created in favour of trustee (similar to debenture trustee)


DEPOSITS (Contd.) Creation of Deposit Repayment Reserve

mandatory. This is in the form of liquid assets. Amount equivalent to 15% of deposits maturing during the year and next year.

Earlier Private companies were also required to maintain liquid assets. Now wef 05.06.2015 they are exempted.

They also have to file return of deposits.


DEPOSITS (Contd.) In case of deposits held by existing

companies, they have to be repaid within the due date or one year.

National Company Law Tribunal can extend time for repayment.

Rules however have given respite to cos. They can repay the deposit and interest as per the terms on which they are accepted. That will be sufficient compliance. But if they fail, then penal provisions will apply.


RECENT EXEMPTIONS TO PVT COS Can accept deposits from members upto 100% of

PUC and free reserves. Details to be filed with ROC

Following conditions will not apply (Sec 73(2) sub clauses (a) to (e):

Issuance of circular to members, credit rating, filing of circular with ROC, Creation of deposit repayment reserve account, deposit insurance, certification that co has not committed any default in repayment of deposits or payment of interest.


DEPOSITS (Contd.) Anomaly in DPT 3 and Rules Rules talk about aggregate of Paid up

capital and free reserves DPT 3 talk about Net Worth Securities application money accepted

prior to 01.04.2014 and remaining as such on 31.03.15 shd be allotted securities or refunded by 01.06.15 or deposit rules need to be complied with.


DEPOSITS – EXEMPTION CRITERIA

List of exemptions: Money recd from Govt/local/statutory authority or

amount recd and guaranteed by govt. Subject to FEMA, any amount received from

foreign sources like collaborators, banks, fin institutions, foreign Govt etc

Any amount received as loan/facility from bank Loan or fin assistance from public fin inst Amt recd on issue of commercial paper or other

instrument Amt recd from any other co.


EXEMPTIONS (Contd.) Securities application money or allotment money.

Allotment to be made within 60 days else refund within next 15 days. No other adjustment permissible

Loan from Director with a declaration Amt raised by issue of secured bonds/debentures.

First charge or pari passu first charge on assets excl intangible assets. Such amt not to exceed market value of assets as per valuation of regd valuer. Also Amt raised by compulsorily convertible deb. Conversion within 5 yrs


EXEMPTIONS (Contd.) Security deposit from employee not exceeding his

annual salary and it should be non-interest bearing. Any non-interest bearing amount held in trust. Advance for supply of goods/services should be

appropriated within 365 days Advance for sale of immovable property should be

adjusted against property Adv against supply of capital goods but if any of the above three cases, if the company

has to refund money as the Co did not have necessary permissions/approvals to deal in the goods etc, then the amount will be treated as deposit.


EXEMPTIONS (Contd.) Security deposit for performance of

contract for supply of goods /services. An amt from promoters/relatives in the

form of quasi equity pursuant to stipulation from bank/fin inst

Amt recd by a Nidhi co.


EXTREMELY IMPORTANT PENAL PROVISION:

Sec 74: If existing deposit is not repaid within due date or one year or extended time, minimum penalty Rs. 1 cr., may go to Rs. 10 cr.

Officer in default liable to imprisonment upto 7 years or fine (min Rs. 25 lakhs, Maximum Rs. 2 cr) or both.

If fraud in acceptance is proved, every officer accepting deposit, is personally responsible for losses, damages.


NEW PENAL PROVISION Sec 76A: Contravention of sec 73 or 76 or

rules: Co- In addition to payment of deposit and

interest, Rs. 1 cr , can go up to Rs. 10 cr OID imprisonment up to seven yrs or fine

min 25 lakh max 2 cr or both


OTHER POINTS Enhancement in penalty, appointment of

prosecutors for courts and adjudicating officers for trying offences. This means enforcement of the provisions would be done seriously.

Hence, a change in mindset necessary. “Chalta Hai” attitude needs to be abandoned.

Likely effects: a) cost of compliance b) increase in business of insurance co. c) increase in litigation, cash flow problems


THANK YOU.
