UNIT II
Prospectus and allotment of securities
PROSPECTUS:
A prospectus is basically a formal and legal document issued by a body corporate which acts for inviting offers from the public for subscription or purchase of any securities. Every public company is entitled to issue the prospectus for its shares or debentures. But the same is not required for a private company.
Section 23: Public Offer and Private Placement
This article focuses on the methods that can be used by public and private companies to issue securities and raise money enumerated under section 23 of the companies act, 2013 along with relevant SEBI Rules and Guidelines.
Introduction:
Section 23 of Companies Act, 2013 lays down the provision for public offer and private placement. The 2013 Act became effective in stages over 2013 and 2014. This section is a part of chapter III of the act, 2013. It briefly lays down the methods that can be used by public and private companies to issue securities and raise money. There are two parts to chapter III, the first part relates to public offer and the second part pertains to private placement. Hence every company that wishes to issue securities and raise money has to follow through and compile this chapter. The purpose of his analysis is to give a better understanding of this section and to analyze the rules and regulations governing issuance of securities by company.
Purpose of Section 23
Chapter 3 of Companies Act 2013 lays down the provisions with respect to prospectus and allotment of securities. Section 23 being the first section under this chapter lays down the basic methods of issuing security used by public and private companies. The section briefly lays down the following:
A public company can issue securities in three ways as follows:
A listed company or a company, which intends to get its securities listed, can issue securities according to the provisions of Securities and Exchange Board of India Act, 1992 and necessary prescribed rules.
A private company may issue securities in following ways:
Rights issue or bonus issue:
Private Placement:
An explanation of this section clarifies that a “Public Offer” under this section includes initial public offer or further public offer of securities by the company or an offer of sale of securities to the public by an existing shareholder through issue of prospectus. An initial public offer refers to an offer of securities by an unlisted company to the public for subscription and includes an offer for sale of securities to the public by any existing holder of such securities in an unlisted company. A further public offer refers to an offer of securities by a listed company to the public for subscription and includes an offer for sale of securities to the public by existing holders of such securities in a listed company.
By way of public issue that is by issuing securities to public at large a company can be listed on a recognized stock exchange in India. For public issue there are various rules and regulations that have to be followed as well, like SEBI (Issuance of capital and disclosure requirement) regulation, 2009 and SEBI (Listing obligations and Disclosure Requirements), Regulations 2015 as under section 24 of the act, 2013, SEBI has power to regulate issue and transfer of securities by listed and unlisted companies. Publicly traded securities are subject to more regulations and scrutiny than those for private placements by a company.
A prospectus as per companies act, 2013 is defined as a “document inviting deposits from the public or a document-inviting offer from the public for the subscription of shares or debentures of the company”. Private placement is basically a way of raising capital by company by issuing private placement offer letter for securities to a relatively small group of selected investors. In general, private placements do not have to be registered with the Securities and Exchange Commission and do not require majority of disclosure requirements found in public offerings. This way of raising security is governed by section 42 of Companies Act 2013. Section 42 of Companies act 2103 read with rule 14(2)(b) of Companies (Prospectus and allotment of securities) rules, 2014 states that an offer to more than 200 persons in the aggregate in a financial year will constitute a public offer.
Raising money by way of rights issue is method used by company to offer shares directly to existing shareholders of the company in proportion to their existing holding. Bonus issue is when company issues fully paid up shares to its own members.
Situation Before Enactment of Section 23:
This provision was first time introduced in the Companies Bill, 2011. Before this there was no similar provision. This particular clause of the bill was amended by the suggestions of standing committee on finance. There after the amended clause now stands as Section 23 of the act, 2013.
Application of Section 23:
This newly inserted provision lists out the mode and means by which private and public limited companies can issue securities, thus providing explicit means for issuance of securities by both public and private companies in India. There is confusion and dilemma with respect to its application, which has not been up till now explicitly cleared up by any notification or legislation. It is believed that use of the word “May” with respect to private placement creates ambiguity. If this “May” is to be interpreted in its literal sense than it would mean that a private company issuing securities can also follow the procedure under Section 42 (private placement), Section 54 (issue of sweat equity shares), Section 62 (further issue of share capital), Section 71 (debentures) and Rule 12 of Companies (Share Capital and Debentures) Rules, 2014 independently. But at the same time if the “May” in section 23(2) is to be interpreted and read as shall, it would become a mandatory provision and it would mean that if a company has to issue securities under the act, 2013 it has to be done as per the provision of section 23(2), that is every time any security, whether shares, debentures or employee stock options, are proposed to be issued either a private placement or a rights issue process will have to be followed by the private company, unless such shares are being issued as bonus shares.
Amendments to Section 23:
This section has been quite constant and has not been amended as it was is a fairly new section, incorporated for the first time in 2013 act and merely lays down the methods to be used by companies to issue securities. More detailed procedure about each method is further explained under different provisions following this section. There has been a circular providing clarity on the applicability of this section. The M.C.A circular clarifies that unless the applicable law and rules/regulations of RBI explicitly specify the application of this section and all other sections under chapter III of the act, 2013 will not be applicable for issuance of foreign currency convertible bonds and foreign currency bonds by companies to person resident outside India.
Key Takeaways:
“Share” means a share in the share capital of a company and includes stock. This article talks about share capital and types of share capital under The Companies Act, 2013.
Share Capital:
Share capital is known as owned capital of the company. It denotes the amount of capital raised by the issue of shares, by a company. Since it is the money of the shareholder, the shareholder are the owners of the company. The total share capital however divided into small parts and each part called as share. Share considered the smallest part of the total capital of a company.
Kinds of Share Capital
The share capital of a company limited by shares shall be of two kinds, namely:—
a. Equity share capital.
b. Preference share capital.
Equity share capital:
“Equity share capital” with reference to any company limited by shares, means all share capital which is not preference share capital.
The Equity share capital—
i. With voting rights; or
ii. With differential rights as to dividend, voting or otherwise in accordance with such rules as may prescribed.
These differential rights may have difference related to dividend, voting or otherwise in accordance with rules. The term otherwise bring scope for innovation with in limit of rules. It may because of difference related to managing control, power to appoint director, or power to appoint proxy and so on.
Preference share capital:
“Preference share capital”, with reference to any company limited by shares, means that part of the issued share capital of the company which carries or would carry a preferential right with respect to—
A. payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, which may either seem free of or subject to income-tax; and
B. repayment, in the case of a winding up or repayment of capital, of the amount of the share capital paid-up or deemed to have paid-up, whether or not, there considered as preferential right to the payment of any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company.
Voting Rights:
1. Every member of a company limited by shares and holding any preference share capital therein shall, in respect of such capital, have a right to vote only on resolutions placed before the company which directly affect the rights attached to his preference shares,
2. Any resolution for the winding up of the company or for the repayment or reduction of its equity or preference share capital and his voting right on a poll shall be in proportion to his share in the paid-up preference share capital of the company.
3. The proportion of the voting rights of equity shareholders to the voting rights of the preference shareholders shall be in the same proportion as the paid-up capital in respect of the equity shares bears to the paid-up capital in respect of the preference shares.
4. The dividend in respect of a class of preference shares has not been paid for a period of two years or more, such class of preference shareholders shall have a right to vote on all the resolutions placed before the company.
Introduction to Concept of Debentures:
In every corporate organization, enormous or not, engaged in doing business or involved in manufacturing activity or industry providing services, there is always requirement of finances and funds. In order to run a business effectively and successfully, adequate amount of capital is necessary. In some cases it is capital is arranged through internal resources i.e. by way of issuing equity share capital or using accumulated profit . Equity funds are raised by taking money from the shareholders by way of their initial contribution in fixed income securities such as treasury bills and bonds. The share holders are the owners of the company.
Equity funds most of the times is not adequate and the organization is resorted to external resources for arranging capital i.e. External Commercial Borrowing(ECB), Debentures, Bank Loan, Public Fixed Deposits etc. There is a provision of powers to borrow for the company in the memorandum of association of a company. The loans are raised by the corporate sector by the way of issuance of debentures. As the funds raised by the issue of shares are not adequate to meet the financial demand of the company for long run. Hence, the companies choose to raise long- term funds through debentures.
A Debenture is basically some of the loan amount the company was interested to raise from the public , that is why it issues debentures. A person who has bought a debenture and holding it is called a debenture holder. A debenture holder is the creditor of the company. Under the seal of the company.
Debenture is document issued under the seal of the company. Debenture is an acknowledgment of the funds received by the company equal to the nominal value of the debenture. It includes the payment of interest at a fixed rate till the times the principal sum becomes repayable. There may or may not be a charge put on the sets of the company as security. The date of redemption along with the rate and mode of payment of interest are mentioned in it. The last few years has seen the capital market of India to evolve at a much faster rate, the reasons are launch of new instruments and the modifications in the old technology. In the present situation debentures prove to be a great contributor to support the financial needs of the corporate sector.
Characteristics of Debentures:
1. Debenture is a movable property. It is in the form of a certificate of indebtedness of the company and issued by the company itself. It generally creates a charge on the undertaking or undertakings of the company. There is usually a specific date of redemption.
2. The debenture holders are creditors to the company and they do not have any claim of ownership of the company unlike share holders. The company is only under debt of the debenture holders.
3. As the debenture holders are not the owner of the company so they are not entitled with the administration and management of the company.
4. The debenture holder need not be concerned with the profits or loss of the company, they have a fixed rate of interest on the principal amount which they get every year irrespective of the financial condition of the company.
5. Debentures usually have a charge on the assets of the company, which means that if the company on liquidation is not able to repay the amount the debenture holders can sell of property of the company to recover money.
6. There is an undertaking given by the company to repay debenture holders the principal amount along with the interest at the state time.
7. The debenture holders cannot claim the privilege to vote in any meeting of the company.
8. When the company is winding up, the first priority of the company is to repay to the debenture holders of the company hence , there is no risk involved of loss of money of the debenture holders.
Kinds of Debenture:
Debentures are generally classified into different categories on the basis of:
(1)Convertibility of the instrument.
(2)Security of the instrument.
(3)Redemption ability.
(4)Registration of Instrument.
Debentures are classified into following categories:
(A) Non Convertible Debentures- This type of debentures cannot be converted either into preference shares or equity shares. Non-convertible debentures can either be unsecured or secured. These type of debentures are usually redeemed only on the maturity of a predetermined period which may be 10 or 20 years. These instruments retain the debt character and cannot be converted into shares.
(B) Partly Convertible Debentures - Apart of these instruments are converted into equity shares in future at the notice of issuer. The issuer decides the ratio for conversion. The ratio is usually decided at the time of subscribing the debentures. If a debenture converts some of his debentures into share, he a member as other shareholders for those shares, amending the rights accordingly. Thus convertible debentures may be called as debentures which can be converted by the debenture holder after a specific time.
(C) Fully Convertible Debentures -These are those debentures which can be converted into equity or preference shares after a certain period at predetermined rate of exchange. If a debenture converts his debentures into share, he cease to be the creditor of the company and become a member as other shareholder, amending the rights accordingly. Thus convertible debentures may be called as debentures which can be converted by the debenture holder after a specific time. At the time of issue of debenture the rate at which the exchange takes place is decided . Till the time of conversion only the interest is paid to the debenture holder and after that the rights exercised would same as shareholder. In order to issue convertible debentures prior approval of the shareholders is mandatory. The sanction of central government also required for issuing convertible debentures.
(D) Optionally Convertible Debentures- It is a t the option of the debenture holder to convert these debentures into share. The price for such conversion is decided by the issuer and was consented upon by both parties at the time of issue of debenture.
2. On the basis of security:
Debentures are classified into following categories:
(A) Secured Debentures- “The instruments which are secured as there is a charge on the fixed assets of the company. This is to secure the debenture holder as and when the issuer makes a defaults in the payment of either the principal or interest amount, the assets of the issuer can be sold off in order to do away with the liability to the debenture holders by repayment. In Companies Act, 2013 there is a provision in Section 71(3) which says that a company has right to issue secured debenture subjected to the conditions of the government of India.
(B) Unsecured Debentures-“ These type of debentures are unsecured in the way that if there is a default in payment of the principal amount or interest amount the debenture holder will have be along with other unsecured lenders and hence could not sell any property or anything for repayment hence they are also called naked debentures.
3. On the basis of Redeemability:
Debentures are classified into following categories:
(A)Redeemable Debentures- The debentures which are issued with the option of redemption on demand or after serving notice or at a fixed date or through a system of periodical drawing. Usually debentures are of redeemable nature and after redemption they can either be cancelled or can be reissued. The priorities and rights of the person who is reissued the debentures shall be same as the debentures were never redeemed.
(B)Perpetual or Irredeemable Debentures- “an irredeemable debenture is a type of debenture in which there is not fixed time for the issuer to repay the amount. The debenture holder does not have right to demand for the payment of principal amount until and unless the company does not default in making payment of the interest regularly. If a company is going into liquidation it has to pay for all the debenture whether redeemable or irredeemable.
4. On the basis of Registration:
Debentures are classified into following categories:
(A) A Registered Debentures- The debentures which are made in the name of a particular individual who is registered by the company as the debenture holder on their register of debenture holders and also his name appears on the debenture certificate. These debentures can be transferred in the similar way as shares are transferred by due means of proper instrument which includes stamped duly, executed and satisfying the demands under Section 56 of the Companies Act, 2013.
(B) Bearer Debentures- These shares on the other hand are negotiable instrument are made out to bearer and so are transferrable by only delivery like share warrants. The person to whom a beared debenture is transferred becomes a "holder in due course" and he has a right to recover and receive the principal amount along with interest on it.
Issue of Debentures:
The manner of issuing of debentures is usually similar to that of issuing share, it is through prospectus inviting applications for debentures, the money is to be paid in installments on application, allotment and on specific dates. Debentures can, be issued in three ways.
At par: When the amount collected for it is equal to the nominal value of debentures ,it is said to have been issued at par. e.g. the issue of debentures of Rs. 300/- for Rs. 300/-
At Discount: When the amount collected is less than the nominal value, debenture is said to have been issued at discount. For e.g., issue of debentures of Rs. 300/- for Rs. 270/-. The difference of Rs. 30/- is the discount and is called discount on issue of Debentures. This discount on issue of debentures is a capital loss.
At Premium: A debentures is said to be issued at a premium , when the price charged is more than its nominal value. e.g., issue of debentures of Rs. 300 each for Rs. 320, the excess amount over the nominal value i.e., Rs. 20 is the premium on issue of debentures. Premium received on issue of debentures is a capital gain. This Premium on issue of debentures could not be used for distribution of dividend. Premium on debentures reflected under Surplus and the head Reserves on the liability side of the Balance Sheet.
Time limit for issue of debenture certificate:
The allotee is entitles to be issued with the debenture certificate within a period of 6 months from the date of allotment. It is provided for in Section 56(4) of the Companies Act, 2013. The Section 56(6) of the Companies Act, 2013 provides that if a company fails to issue the debenture certificate within the time limit, it shall be made liable to pay a fine minimum of 25,000 rupees which may extend to 5,00,000 rupees. The officer who is in default shall by punished with a fine which is 10,000 rupees minimum and extending to 1,00,000 rupees.
Rights/Remedies of Debenture Holder:
1. According to the rule 18[11]it is the duty of the debenture trustee to communicate debenture holders defaults, if occurs, with respect to redemption of debentures or payment of interest and any either action taken by the trustee himself. Besides , the debenture trustee appoints a nominee director on the board of the company if there are 2 consecutive defaults by the company in payment of interest to the debenture holder or failure in redemption of debentures.
2. As per the section 71(8) of the Companies Act, 2013 the debenture holder is entitled to interest and redemption of debentures in accordance with the conditions of their issue.
3. In section 71(10) of the Companies Act, 2013 there is a provision if the company makes a default either in payment of interest due or in redemption of debentures on date of maturity of debentures, the Tribunal may , on application wither of debenture trustee or of any or all of the debentures and, after hearing the parties involved , direct, through order , the company to redeem the debenture with payment of principal amount as well as the interest overdue.
4. Further if the companies make a default in complying with the order of the tribunal, the section 71(11) of the Companies Act, 2013 provides that the tribunal shall punish the officers in default with an imprisonment which may extend to 3 years or with fine shall minimum be of 2,00,000 rupees and can extend to 5,00,000 rupees or both. This section is applicable to both secured and unsecured debenture holder. The debenture holder can give an application to the Tribunal to pass an order of payment for the company which has defaulted. The Tribunal before passing an order takes into account the circumstances under which the company defaulted in making payment.
5. Section 164(2)(b) imposes for disqualification of the directors of the company who has defaulted in redemption of debentures on the date of maturity and if such default has continued for 1 year or more. Such a person will not be able to be director of that company ever again or of any other company for 5 years from the date on which the company has failed to redeem the debentures.
6. Section 186(8) of the Companies Act, 2013 provides that any company who has failed to repay any deposits or payment of interest shall not give any loan or guarantee or make any acquisition or provide any security till such default subsists.
Redemption of Debenture:
Redemption of debentures stands for repayment of the total amount of the debentures by the company in accordance with the terms and conditions of the issue. Once a debenture is redeemed by the company, it is discharged or absolved of the liability on account of those debentures. There are four ways by which the debentures can be redeemed.
These are:
1) Payment in lump sum-“ At the end of stipulated time period the company redeems debenture by the payment of lump sum amount as per the terms of issue.
2) Payment in installments-“The payment for redemption of debentures in this case is made in installments on specific dates during the tenure of the debenture. The total liability of the company is divided into number of years.
3) Purchase in the open market-“Redemption of debentures by purchase in the open market is when a company purchases its own debenture to for the purpose of cancellation of such debentures.
4) By conversion into shares or new debentures- In this type the companies redeems its debenture by converting them either into share or creating a new class of debentures. It is at the option of the debenture holder to exercise their right of converting the debentures if he finds the offer beneficial.
Debenture Redemption Reserve Account:
As under Section 71(4) of the Companies Act, 2013 at the time of issuing of debentures by the company, it is mandatory for the company to create a debenture redemption reserve account with the profits of the company which are available for dividend and the amount added to such account can be utilized for no purpose other than redemption of debentures.
There are certain conditions prescribed under Rule 18(7) of Companies (Share Capital and Debentures) Rules, 2014. Under it is obligatory for the company to a Debenture Redemption Reserve for the purpose of redemption of debentures, as per the conditions given below :-
(a) Creation of the Debenture Redemption Reserve shall be out of the profits of the company available for payment of dividend.
(b) The company shall create Debenture Redemption Reserve equal to at least 50% of the money gathers through the debenture issue before debenture redemption starts.
(c) The creation of Debenture Redemption Reserve shall not be latter than 30thof April in each year, deposit or invest an amount which is not below 15% of the amount of debentures maturing during the year till 31stMarch of the next year, in one or more of the below mentioned ways:-
(i) in deposits with any scheduled bank, free from any charge or lien.
(ii) in unencumbered securities of the Central Government or of any State Government.
(iii) in unencumbered securities[12].
(iv) in unencumbered bonds issued by any other company[13].
(v) the amount deposited or invested as mentioned earlier is not supposed to be used for any purpose other than for redemption of debentures maturing during the year referred above, Provided that the amount remaining invested or deposited, as the case may be, shall not at any time be less than 15% of the amount of the debentures maturing during the year ending on the 31st day of March of that year.
(d) In case of partly convertible debentures, Debenture Redemption Reserve shall be created in respect of non-convertible portion of debenture issue in accordance with this sub-rule.
(e) The amount added to such account can be utilized for no purpose other than redemption of debentures.
Key Takeaways:
Deposits have been defined under the Companies Act, 2013 (2013 Act) to include any receipt of money by way of deposit or loan or in any other form by a company. However deposits do not include such categories of amounts as may be prescribed in consultation with the Reserve Bank of India (“RBI“). Chapter V of the 2013 Act and the Companies (Acceptance of Deposits) Rules, 2014 as amended from time to time (“Deposits Rules“) primarily cover regulations relating to deposits. The Deposits Rules provide an exhaustive definition of deposits which is exclusionary in nature and exclude certain amounts received by a company, from the ambit of deposits. It may also be noted that the Companies Act, 1956 (“1956 Act“) and the Companies (Acceptance of Deposits) Rules, 1975 also defined deposits in a similar manner and excluded certain amounts which were not to be considered deposits.
Deposits has been an important source of funding for the corporates in India. Under the Companies Act, 1956 regime, provisions related to deposits was less stringent as compared to under its successor.
Companies Act, 2013, initially laid down a kind of prohibition for acceptance of deposit which was later relaxed through various amendments and providing crucial exemptions to private companies. Private Companies can now accept deposits from its member with minimum regulatory compliances.
Before moving towards the regulatory requirements for accepting deposits by the Company, it must be clear what is Deposit and what are excluded from the ambit of deposit or not termed as deposit.
Definition of Deposit:
Deposit has been defined under Section 2(31) of the Companies Act, 2013 further expanded under the Deposit Rules, 2014.
As per Section 2(31), “deposit” includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India.
Accordingly, Rule 2(1)(c) of Companies (Acceptance of Deposit) Rules, 2014, excludes the following amount received by a Company from the ambit of Deposit and shall not be considered as deposits –
i. Any amount received from the Central Government or a State Government or local authority or statutory authority, or any amount Whose repayment is guaranteed by the Central Government or a State Government;
ii. Any amount received from foreign Governments, foreign or international banks, foreign bodies corporate and foreign citizens, foreign authorities or persons resident outside India;
iii. Loans or facility from banks;
iv. Loans from Public Financial Institutions/ Insurance Companies;
v. Any amount received against issue of commercial paper or any other instruments;
vi. Any amount received by a company from any other company;
vii. Any amount received through Public offer. However, if securities not allotted within 60 days and refund not made within 15 days then such amount will be treated as Deposit;
viii. Any amount received from the director of the company and in case of private company also from the relative of the director of the company subject to the condition that the amount has been given from own’s fund and not from borrowings.
ix. Any amount raised by the issue of bonds or debentures secured by a first charge or a charge ranking pari passu with the first charge, compulsorily convertible within 10 years;
x. Any amount raised by issue of Unsecured Non-convertible debentures;
xi. Non-interest-bearing security deposit from employee of the company under the contract of employment to the extent not exceeding his annual salary;
xii. Any non-interest bearing amount received and held in trust;
xiii. Any amount received in the course of business –
(a) As advance for supply of goods or services provided that such goods or services are supplied within 365 days of the receipt of advance;
(b) As advance in connection with consideration for an immovable property provided such advance is adjusted against such property in accordance with the terms of the agreement;
(c) As security deposit for the performance of the contract;
(d) As advance under long term projects for supply of capital goods;
Provided that if the amount received under (a), (b) & (d) becomes refundable due to lack of necessary permission or approval to deal in the concerned goods or services, then the amount received shall be deemed as deposit on the expiry of 15 days from the date they become due for refund.
(e) As advance towards consideration for future warranty or maintenance contract;
(f) As advance received which is allowed by any sectoral regulator;
(g) As advance for subscription towards publication;
xiv. Any amount of unsecured loan brought in by the promoters subject to the fulfilment of the following conditions:
(a) The loan is brought in pursuance of the stipulation imposed by the lending institutions on the promoters to contribute such finance;
(b) The loan is provided by the promoters themselves or by their relatives or by both; and
(c) The exemption under this sub-clause shall be available only till the loans of financial institution or bank are repaid and not thereafter;
xv. Any amount accepted by a Nidhi Company;
xvi. Any amount received by way of subscription in respect of a chit under the Chit Fund Act, 1982;
xvii. Any amount received by the company under any collective investment scheme;
xviii. An amount of 25 lakh rupees or more received by a start-up company, by way of a convertible note (convertible into equity shares or repayable within a period not exceeding five years from the date of issue) in a single tranche, from a person;
xix. Any amount received by a company from registered Alternate Investment Funds, Domestic Venture Capital Funds, Infrastructure Investment Trusts and Mutual Funds.
Interpretation on Deposits from Member, Director & Relative of Directors of Private Company :
As per Rule 2 (1) (c) (viii) of Companies (Acceptance of Deposits) Rules, 2014 –
“Deposit” does not include any amount received from a person who, at the time of the receipt of the amount, was a director of the company or a relative of the director of the Private Company:
Provided that the director of the company or relative of the director of the private company, as the case may be, from whom money is received, furnishes to the company at the time of giving the money, a declaration in writing to the effect that the amount is not being given out of funds acquired by him by borrowing or accepting loans or deposits from others and the company shall disclose the details of money so accepted in the Board’s report;
Simplified Interpretation: –
Amount received (i.e. Loan) from director of the company (whether public or private) is NOT “Deposit”.
Amount received (i.e. Loan) from RELATIVE of director of the PRIVATE COMPANY is NOT “Deposit”.
Therefore, in case of public company, amount received from relative of director of the public company is considered as “Deposit”.
Following class of PRIVATE COMPANIES can accept deposit exceeding 100% of aggregate of paid up capital, free reserves and securities premium (i.e. no maximum limit of acceptance of deposit)
1. A Private Company which is a start-up, for five years from the date of its incorporation;
2. A Private Company which fulfils all of the following conditions, namely:-
a) Which is not associate or a subsidiary company of any other company;
b) The borrowings of such a company from banks or financial institutions or anybody corporate is less than twice of its paid up capital or Rs. 50 Crore, whichever is less.
c) Such a company has not defaulted in the repayment of such borrowings subsisting at the time of accepting deposits.
Key Takeaways:
While running business, whenever companies are short of capital and where there is a need to enhance the growth and to increase the capital, the simplest way is company borrows money from financial institutions or banks keeping its security as collateral. In this event charge is created for securing loans or debentures by way of mortgage on the assets of the company.
The main purpose of registration of charge is to give notice to the Registrar of Companies (RoC) and also to the people who advance money to the company about the encumbrance created on the assets of the company. Chapter VI of Company Act, 2013 (the CA, 2013) governs the registration of charges (Section 77 to 87).
WHAT IS CHARGE?
In common parlance a charge is a right created by any person including a company referred to as “the borrower” on its assets and properties, present and future, in favour of a financial institution or a bank, referred to as “the lender”, which has agreed to extend financial assistance.
As per Section 2(16) of the CA, 2013 charge means an interest or lien created on the property or assets of a company or any of its undertakings or both as security and includes a mortgage.
TYPES OF CHARGES
Fixed Charge:
A charge which is identifiable with specific and clear asset/property at the time of creation of charge.
The Company cannot transfer such identified and defined property unless the charge holder (creditor) is paid off his dues.
Floating Charge:
It covers the floating and circulating nature of properties of a company, like sundry debtors, stock in trade etc.
The nature of the property charged may change from time to time.
The floating charge crystallizes into fixed charge if the Company crystallizes or the undertaking ceases to be a going concern.
REGISTRATION OF CHARGES
1. Whose duty to register the charge: Section 77 cast the duty to register the charge on the Company which creates such charge.
2. What type of charge to be register: Every type of charges whether created within or outside India on its property or assets or any of its undertakings whether tangible or otherwise, and situated in or outside India.
3. Procedure to register the charge: Every Company creating charge is required to register the particulars of such charge which should be signed by the company and the charge-holder together with the instruments, if any, with the Registrar within 30 days of its creation in the following mentioned e-forms.
4. In which form:
Form CHG-1 – for other than Debentures.
Form CHG-9 – for Debentures.
5. What if delay in registering within 30 days: Registrar may, on an application by the company, allow such registration to be made;
In case a charge is created before the commencement of the Companies (Amendment) Ordinance, [2019] the charge should be registered within 300 days of such.
In case the charge is created on or after the commencement of the Companies (Amendment) Ordinance, [2019] it shall be registered within 60 days and by paying additional fees.
Provided further that if registration is not made within the period specified:
The proviso to clause (a) states that if the charge created is not registered within 300 days, it shall be registered within 6 months from the commencement of the Companies (Amendment) Ordinance, [2019] by paying additional fees.
The proviso to clause (b) states on payment of additional fees the registrar may extend the further period of 60 days.
6. Subsequent registration of a charge shall not prejudice any right acquired in respect of any property before the charge is actually registered.
7. Issue of certificate of registration: Registrar shall issue, to the company or to the person in whose favor the charge is created, a certificate of registration of charge in form CHG-2 (w.r.t. section 77 and 78),certificate of modification of charge in form CHG-3 (w.r.t. section 79). Such Certificate shall be conclusive evidence that the requirements of Chapter VI of the Act and the rules made there under have been complied with.
8. No charge created by a company shall be taken into account by the liquidator or any other creditor unless it is duly registered but shall not prejudice any contract or obligation for the repayment of the money secured by a charge.
Application for registration of charge by the charge holder:
1. Option to register the charge by charge holder: Where a company fails to register the charge within 30 days. Then the person in whose favour the charge along with the instrument is created may apply to the Registrar for registration of the charge in the form CHG-1 or CHG-9 as the case may be, within a period of 14 days after giving notice to the company.
2. However it shall be noted that company will still be liable in respect of any offence under this Chapter.
3. The charge holder shall be entitled to recover from the company the amount of any fees or additional fees paid by him to the Registrar for the purpose of registration of charge.
Date of Notice of Charge:
Where any charge on any property or assets of a company or any of its undertakings is registered under section 77, any person acquiring such property, assets, undertakings or part thereof or any share or interest therein shall be deemed to have notice of the charge from the date of such registration.
Register of Charges to be kept by Registrar:
1. The particulars of charges maintained on MCA shall be deemed to be the register of charges for the purposes of section 81 read with Rule 7 of the Companies (Registration of Charges) Rules 2014.
2. The register shall be open to inspection by any person on payment of fee.
Company to Report Satisfaction of Charge:
1. Within 30 days from the date of payment or satisfaction in full of any registered charge, Company shall give intimation to registrar in form CHG-4. Provided the same can be filed within 300 (30+270) days with additional fees. If company fails to file within 300 days then it shall file the form CHG-8 for condonation of delay.
(It shall be noted that CHG-8 can be filed for condonation w.r.t. creation, modification, satisfaction as the case may be)
2. Once the Registrar enters a memorandum of satisfaction of charge in full, he shall issue certificate of registration of satisfaction of charge in Form No.CHG-5.
Company’s Register of Charges:
Every company shall keep at its registered office a register of charges in form CHG-7 and shall be open for inspection in business hours for any members and creditors without payment or by any other person on payment of such fees as may be prescribed.
References:
