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Cos Act Ep#2: Incorporation, Management & KMP Remuneration

Published on Mon, Apr 28,2014 | 16:18, Updated at Tue, Jun 03 at 16:35Source : CNBC-TV18 |   Watch Video :

Doshi: Last week, we gave you an overview of how life will change; thanks to India’s new company law. This week onwards, we kick off our Chapter-wise analysis.

Up for discussion today 

Ch II: Incorporation of Companies & Matters Incidental…

Ch VII: Management & Administration

Ch XIII: Appointment and Remuneration of Managerial Personnel

CNBC-TV18's Menaka Doshi speaks to M&M’s Narayan Shankar, Great Eastern Shipping’s Jayesh Trivedi and Khaitan’s Sharad Abhyankar.

Doshi: The Companies Act 2013 brings to India for the first time the concept of a one person company or an OPC. An OPC is a private company where only one person is a member or shareholder. That person must be a natural person who is a citizen and resident of India and he can be a member of only one OPC. An OPC cannot carry out non-banking financial activities including investments of any body corporate. If it’s paid up capital or revenue exceeds certain specified limits, then it must convert to a private company or it could voluntarily convert into a private or public company by increasing its number of members and directors.

ONE PERSON COMPANY
Private Company
Only 1 member
Member must be natural person who is a citizen & resident of India
Can be member of only one OPC
No NBFC activities
No Investments in securities of body corporate

ONE PERSON COMPANY
Must convert to private company if
-    paid up share capital exceeds Rs 50 lakhs OR
-    average turnover exceeds Rs 2 cr in preceding 3 years

Can convert to private or public company after 2 years of incorporation
-    by increasing minimum number of members and directors
-    by maintaining minimum paid up capital for such class of company

Shankar: It will actually have advantage of proprietary firm with the benefits of limited liability and it also brings in a different concept. Although you are having a one person company, you can have a Board completely up to 15 Directors. So you can say that I am a one person company but I would like to professionally manage it. It is less statutory compliances, no need of cash flow statements, no need of Board meetings if you are just one Director, no need of AGMs, hassle free definitely and best of both worlds.

Abhyankar: I am not too sure because professionals would have expected that it would have been available even for corporates to form one person companies and limiting to only an Indian resident citizens- I think that is quite a dampener.

Trivedi: Apart from that there is also one important benefit of this is that banks and lenders would be more comfortable to lend to a corporate being a one member company instead of a partnership.

Doshi: Another first for the Companies Act 2013, it permits a company’s Articles to contain provisions of entrenchment. Entrenchment provisions can be introduced on the formation of the company or later by the approval of all members in the case of a private company and by a special resolution in a public company.

ENTRENCHMENT PROVISIONS
Section 5(3): The articles may contain provisions for entrenchment to the effect that specified provisions of the articles may be altered only if conditions or procedures as that are more restrictive than those applicable in the case of a special resolution, are met or complied with.

At formation stage OR
In Private company: By approval of all members
In Public company: By special resolution

Abhyankar: In reality, it has not yet been even attempted. Entrenchment would allow shareholders to agree to certain items where the requirement of passing such a resolution will be enhanced over and above even the special resolution within that. You need a supermajority- far more onerous to pass such a resolution.

Trivedi: Because of this entrenchment, there will be PEs who would be comfortable to invest in a company where there is entrenchment so that their rights are protected.

Shankar: Majority of the shareholder agreements, whether it is the veto power or the pre-emptive price which are part of the shareholder’s agreement, are ensured in the Articles. So you are saying that none of these provisions or any provisions in the Article can be amended without you asking me. That provision is going to be legally valid today.

Abhyankar: In case of change of objects clause, it requires today a special resolution, if our entrance is provisioned and say that you need a 90 percent of the shareholders to vote for this to make it happen, then it is shareholder agnostic.

Doshi: Or you could entrench it to say that you need this private equity investor's permission to be able to change.

Now on to another unique provision in this new company law. A company which has raised money from the public through prospectus and still has any unutilized amount out of that money shall change its objects for which it raised the money only after shareholder approval via a special resolution.

ALTERATION OF MEMORANDUM
Section 13(8): A company, which has raised money from public through prospectus and still has any unutilised amount out of the money so raised, shall not change its objects for which it raised the money through prospectus unless a special resolution is passed by the company and-
(ii) the dissenting shareholders shall be given an opportunity to exit by the promoters and shareholders having control in accordance with regulations to be specified by the Securities and Exchange Board.

This gets interesting- despite the special resolution approval, dissenting shareholders must be given an exit by the controlling shareholder or promoter. SEBI is to prescribe that method of exit. This shareholder exit feature reappears in other Sections of the Act as well.

ALTERATION OF MEMORANDUM
Section 13(8)
If company has raised money from public via prospectus
Still has any unutilised amount of the money raised
Can change objects for which it raised money
Only via SPECIAL RESOLUTION
                                +
Promoter/Controlling shareholder must give dissenting  shareholders opportunity to exit
Via SEBI prescribed method
SEBI yet to prescribe method

Trivedi: This is in spite of the fact that there is a market outside because this is a listed company..(Interrupted by Doshi).

Doshi: So the dissenting shareholder already has one natural route of exit.

Trivedi: Secondly, it says promoters will have to buyout and what kind of situations can happen, only you can judge.

Doshi: So you are saying it is a negative?

Shankar: It is a negative in a sense that if you find some businesses not worthwhile pursuing after a particular period of time and you want to change it and you are getting the full support of the shareholders, you may still have some dissenting shareholder who may try to take advantage and block that and say that unless and until you give me an exit route, I am not going to agree to it.

Abhyankar: Change of object could be legititmate and therefore in fact you are able to pass through that special resolution. So having got that resolution passed, I think it is somewhat unfair to demand from promoters an additional exit opportunity.

Trivedi: But we are sure that SEBI, being wise enough to bring out Regulations, will take care of both these issues.

Doshi: Sort of average of the last few months stock price or something like that?

Trivedi: 52 weeks or something of that nature which can be very clearly established. So it is not something in the hands of the shareholders to create an issue.

Abhyankar: But with a market price being a dynamic value, what can also happen is that because the price offered for exit to minority shareholders is perceived to be higher than even the market price then I think it is unfair on the shareholders who approve that change.

If it is about management and administration then it must be about paper work, in this instance, lots of paper work.  The Companies Act, 2013 requires all changes in the shareholding of promoters and top 10 shareholders of a company to be filed with the registrar within 15 days of the change. The Rules narrow the provision to include only 2 percent changes in shareholding by either value or volume. That is better but not good enough. 

FILING SHAREHOLDING CHANGES
Section 93: Every listed company shall file a return in the prescribed form with the Registrar with respect to change in the number of shares held by promoters and top ten shareholders of such company, within fifteen days of such change

Rules: Every listed company shall file with the Registrar…changes relating to either increase or decrease of two percent, or more in the shareholding position of promoters and top ten shareholders of the company in each case, either value or volume of the shares, within fifteen days of such change.

FILING SHAREHOLDING CHANGES
Section 93
To file change in number of shares held by Promoter & Top 10 Shareholders
Within 15 days of such change

Rules
To file changes in shareholding of  Promoter & Top 10 Shareholders
-    Relating to increase or decrease of 2% or more
-    Either value or volume of shares

Shankar: To a certain extent,its alignment with the Takeover Code and Insider Trading regulations where anywhere plus or minus 2 percent in your promoters or key shareholders you are making that disclosure. The only problem I have over here is the talk of value or volume. Volumes in number of shares is much more achievable, not impossible, it is going to be difficult to keep a track of the top 10 shareholders because it keeps changing every week. But to add to that if you are going to have a threshold of value, it is going to be more difficult and sometimes virtually impossible. 

Abhyankar: Under the Takeover Code and the prevention of insider trading, it is the shareholder who has to first make a declaration to the company and a company’s declaration is really dependent. Here you are asking the company to monitor; so that is unusual.

Trivedi: We get a normal dump of shareholders once a week from the depositories. Now the issue is that for me to take an extra dump is going to be extra cost. 

Doshi: Is it that substantial? 

Trivedi: It is almost Rs 10,000-15,000. 

Doshi: Okay so it is painful, it is costly, it is laborious. The only good news here is that this 2 percent either by value or volume is in the Rules and since it is in the Rules, it is open to a quick change if required and hence you can only hope and pray that the Ministry Of Corporate Affairs (MCA) is listening to you on this. 

The interesting thing in this Chapter and the one that catches my attention at every place in this Chapter is the use of the word ‘electronic’. This is an E-Act, it has finally woken up to the fact that we have moved to the 21st century. So it says that you can give a general meeting notice electronically via email etc. It says that filing and records must be available electronically.

Trivedi: Signature also electronically. 

Doshi: What it also introduces is E-voting. The Rules require all companies with 1000 and more shareholders to provide their shareholders with an e-voting facility. E-voting must stay open for not less than one day and not more than three days. E-voting must conclude three days before a general meeting and a vote cast electronically cannot be changed. So in effect e-voting can be used for all resolutions ordinary or special. It can be used for ordinary business to be transacted at a general meeting and for all resolutions that must be proposed via postal ballots. 

Welcome to the 21st century and welcome to more shareholder participation. But there is always a but!

E-VOTING!
Section 108 - Rules
Every listed company or company having not less than 1000 shareholders
To provide shareholders with E-VOTING facility

E-Voting!
To remain open for minimum 1 day and maximum 3 days
Voting period to be completed 3 days prior to General Meeting date
Vote cast cannot be changed

E-VOTING!

ORDINARY BUSINESS @GENERAL MEETING
Financials & Board/Director/Auditor reports
Declaration of Dividend
Appointment of Directors
Appointment & Remuneration of Auditors

POSTAL BALLOT  
Alteration of Objects clause
Alteration of AoA
Change in place of registered office
Change in objects for which company has raised money and has unutilised funds
Issue of DVR shares
Variation in rights of a class of securities
Buy-back of shares
Election of a Director by small shareholders
Sale of Undertaking
Giving loans/guarantees/security in excess of prescribed limits

Shankar: First the Companies Act actually requires you that there are certain ordinary businesses which have to be transacted only at the annual general meeting. Once E-voting facility is given, the whole concept or the right of the Chairman to put that particular resolution to vote on a show of hands goes out. That means there is no provision for a person to even vote by way of show of hands at the AGM.  

Doshi: This is Section 107- it says at any general meeting, a resolution put to the vote of the meeting shall, unless a poll is demanded under Section 109 or the voting is carried out electronically, be decided on a show of hands. 

VOTING BY SHOW OF HANDS
Section 107. (1) At any general meeting, a resolution put to the vote of the meeting shall, unless a poll is demanded under Section 109 or the voting is carried out electronically, be decided on a show of hands.

Shankar: The critical thing is the intention of this whole Section and the move of Central Government is to have an alternate method but the manner in which it has turned out is actually defeating the purpose that is if I don't have the threshold of a 5 lakh value of shares, I will not be able to ask for a poll. That means people, the small shareholders who come, would like to have exchange of views and also vote are really deprived today.

Doshi: Is it also your interpretation that if a resolution has been voted on electronically, then that resolution can no longer be put to a show of hands in a general meeting- that is the way you read the language?

Trivedi: Absolutely. Though corporates and as Company Secretaries we would love this provision because it will be less burden at the AGM, but to the shareholders this is going to be an unfavorable thing. 

Doshi: So this is the irony- in offering more shareholders access to resolutions and meetings, you have opened up the E-voting route. By doing so, thereby because of the language in Section 107, you have disadvantaged the shareholder who decides to turn-up in person at the general meeting. 

Abhyankar: You are eliminating the benefit of a discussion and debate which means all general meetings are really going to happen through electronic voting. 

Shankar: And clearly the rule is going beyond the Act because the Act requires this to be transacted at the meeting and you are saying I will give a cutoff date of three days prior to the AGM and it will be deemed to have been passed at that AGM. 

Abhyankar: Assuming even the Chairman was to accept a situation - as you know poll is demanded at a general meeting because obviously you cannot do it by show of hands - so a shareholder says that okay I am demanding a poll. I am discussing an item, I am demanding a poll, there is no rule which says how the voting ultimately needs to be aggregated. What the Chairman will only have is a report from the scrutinizer to say that this is the voting pattern that I have observed in the electronic voting. It does not make it mandatory for the Chairman to announce that as a result. Chairman should actually wait, allow the meeting to happen, allow the debate to happen, may be put to vote either because of a demand or by Chairman’s own discretion and then you really need to aggregate those votes to arrive at the mood of the meeting.

Doshi: So, the first problem that you have raised is that if a resolution is put to E-vote it cannot be passed in a general meeting via a show of hands. The exception to that is if either the Chairman or a member calls for a poll and says ok, lets pass this via a poll but the problem with that as you have expressed is that nowhere in the Act or in the Rule is there a provision made for how do you calculate the ultimate outcome when you have both voting - E-voting as well as voting thorough a poll that is been demanded - either by a member or by the Chairman. The logical understanding of this would be that you would combine both results- the results of the poll and results of E-voting- to determine whether the resolution has passed or not. There is one concern you all have not raised about E-voting and that is that the outcome of the E-vote would determine the outcome of the resolution because there would be no show of hands and it may very well be that no member calls for a poll and the Chairman may decide not to call for a poll because the Chairman will already have the results of the E-vote in front of him. In this case, if the response via the E-vote is a very small or minor response then that minor or small set of shareholders will in fact determine the outcome of the resolution.

Shankar: Actually what we started off this topic is exactly right. Small shareholders who get one opportunity at the year end are deprived. 

Doshi: So, how do you fix this? If you were to fix it by saying that E-voting and show of hands is permitted…(Interrupted by guest)

Abhyankar: In show of hands, it’s a one member one vote. Whereas, in case of electronic or postal ballot it is one share one vote. If there was any voting at the meeting, it will have to be conducted only by means of a poll to arrive at logical conclusion because you can’t have one process by show of hands and simultaneously a poll.

Doshi: So, that means show of hands is out of the window? It’s gone with the 1956 Act. Even if they correct the language of Section 107, that means show of hands is gone. Now, all resolutions will have to be passed by way of a poll which will include the outcome of the e-voting, right?

Shankar: Unless the Rules change because the Act does not require the Central Government to prescribe E-voting at the annual general meeting (AGM). E-voting is additional; if that is removed, then show of hands.

Doshi: But then that’s depriving shareholders of the original intent saying we want to reach out to as many shareholders as well.

Trivedi: Just imagine a situation that normally at AGMs poll is not taken. Poll is an exception. With this situation, every AGM will have to go through a process of poll. Now, the time that is consumed in a poll, the independent directors who are - it is very difficult for us to get independent directors at the AGM because the kind of time that goes as far as they are concerned and they have got several companies to attend to. Now, how will we get that kind of participation and what is the kind of time that we will go into in conducting an AGM?

Doshi: I will move on to the other point in this Chapter and that is the change is various thresholds.

Some thresholds remain unchanged, for instance only a shareholder with not less than 10 percent of the paid up share capital carrying right of voting can call an EGM. The 1956 Act imposed the same threshold. Only a shareholder with 10 percent of total voting power or shares of Rs 5 lakh or more can demand a poll in a public company, that’s a minor change versus the 1956 Act. However to move a special notice a shareholder needs not less than one percent of the total voting power or shares of not less than Rs 5 lakh. 1956 Act allowed any shareholder to move a special notice and if a shareholder wants to move a resolution, he needs at least 10 percent of the paid up share capital carrying right of voting, that’s twice the threshold in 1956 Act.

THRESHOLDS OF POWER
To Call An EGM

2013
Not less than 10% of paid up capital carrying right of voting
1956
Not less than 10% of paid up capital carrying right of voting

THRESHOLDS OF POWER
To Demand A Poll

2013
Not less than 10% of total voting power
OR
Shares of not less than Rs 5 lakhs*
1956
Not less than 10% voting power
OR
Shares of not less than Rs 50000*

*paid up

THRESHOLDS OF POWER
To Move A Special Notice

2013
Not less than 1% of total voting power
OR
Shares of not less than Rs 5 lakhs*
1956
No threshold

*paid up

THRESHOLDS OF POWER
To Move A Resolution

2013
Not less than 10% of paid up share capital carrying right of voting
1956
Not less than 5% of total voting power
OR
Not less than 100 members with total shares of not less than Rs 1 lakh*

*paid up

Trivedi: There are four-five issues basically on special notice. One is, removal of a Director, appointing a Director who is non-retiring. Other than a non-retiring director, removal of an auditor. 

Doshi: And in case of resolution, what business would you need?

Abhyankar: Shareholders anyway have limited visibility on the actual operations. Apart from special notice items, there maybe very few items where shareholders have either a say or adequate knowledge to propose a certain resolution. So, rather than allowing it to any shareholder, it’s better you lower threshold of shareholders to any kind of resolution and you will have to go through the machinery of taking up the resolution for a vote. Increasing that threshold is logical.

Doshi: Has management and administration- which is the title of this Chapter - become easier? 

Shankar: I am not saying it is going to be difficult to sign; the manner in which certain clauses are worded, difficult for compliance.

Trivedi: It is absolutely going to be a nightmare for corporates and he has made an understatement. Issue is the kind of paper work, which would be some times mundane and which may not ultimately be fruitful for the right spirit of governance. It will have to be done and redone and redone under this Chapter.     

Doshi: The Companies Act 2013 for the first time recognizes the concept of key managerial personnel (KMP) and requires that every company with a paid-up share capital of Rs 10 crore or more shall have a Managing Director or CEO, Company Secretary and Chief Financial Officer. It also recommends the separation of the Chairman and MD or CEO positions.

Chapter 13 also liberalizes remuneration limits. The overall limit is still 11 percent of net profit. But, the sub limits can be exceeded with shareholder permission including for loss making companies.

KEY MANAGERIAL PERSONNEL
Section 203 - Rules

- Every listed company and every other public company having a paid-up share capital of ten crore rupees or more shall have whole-time key managerial personnel.

- KMP
"    CEO/MD/WHOLE TIMEE DIRECTOR
"    COMPANY SECRETARY
"    CHIEF FINANCIAL OFFICER

- Non-mandatory: Separation of Chairman & CEO/MD positions

REMUNERATION LIBERALISED
Section 197

- Total managerial remuneration < 11% of net profit
"    One MD/WTD/Manager  remuneration < 5% of net profit
"    All MD/WTD/Manager remuneration < 10% of net profit
"    All Director remuneration < 1% of net profit

- Liberalises limits for companies with inadequate profits (or loss-making)

Trivedi: I would say that the biggest positive in this particular Chapter is the flexibility that is being given to the organization to decide within the overall parameter of 11 percent of the profit, how much would the Whole Time Directors take and how much would the Non-executive Directors take.

Shankar: With the approval of shareholders you can have complete flexibility within 11 percent to decide what percentage you give to the Non-Executive Director, Independent Directors and to the working Directors.

Doshi: So instead of going to the government, now you have to go to the shareholder. In the case of a company making inadequate profits or losses, has there been liberalization there as well?

Shankar: If you see the revised Schedule, amounts have really been quadrupled. In fact with the special resolution you can go up to Rs 1.2 crore and one more clear signal it is sending out- companies which are newly formed and you have gestation period of seven years, you say you can pay quite a liberal amount -  actually it goes up to Rs 2.4 crore per annum with special resolution. As well as those companies which are sick companies or are on the path of revival through a package, these two companies specifically have more amount reserved for them so that you have good managerial personnel who can really bring them back; even in the startups.

Doshi: The Companies Act 2013 also introduces a secretarial audit provision for the first time; applicable to the all listed companies and to the public companies with a paid up share capital of Rs 50 crore or more or a turnover of Rs 250 crore or more. Together with the provision that only companies with Rs 10 crore and more of paid up share capital need Company Secretaries, this reduces the burden on small businesses. But, Company Secretaries aren’t too happy about that.

SECRETARIAL AUDIT
Section 204 & Rules

Secretarial Audit Report by
Every listed company
Every public company with paid up share capital of Rs 50 cr and more
Every public company with turnover of Rs 250 cr or more

Doshi: Since both of you are Company Secretaries I will ask Sharad to take an impartial view of this. Is this a good thing or a bad thing? 

Abhyankar: Well, one indication is very clear- company form is not for those who cannot recognize the responsibility and liability aspect. Company Secretary has a significant role to play under the Act and that’s all across because he is in the forefront of the entire compliance.

Shankar: The difference between the private and public is virtually thinning out. Almost all provisions which are applicable to public company re now made applicable to private; whether it is preferential allotment, private placement. You name it, the erstwhile 372A, 295 which is now 185-186- with all these compliance levels and treating private and public as same, not having a secretarial audit for private companies is also not perhaps sending a right signal.

 
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