Companies (Share Capital and Debentures) Third Amendment Rules, 2016

The significant amendments introduced by the MCA, by way of a notification dated July 19, 2016, to the Companies (Share Capital and Debentures) Rules, 2014 (‘Share Capital Rules’), are as follows:

i.  A company that has defaulted in payment of: (a) dividend on preference shares or repayment of any term loan or interest that has become repayable; (b) dues with respect to statutory payments relating to employees; or (c) requisite amounts in the Investor Education and Protection Fund, is now permitted to issue shares with differential voting rights upon expiry of five years from the end of the financial year within which such default has been rectified;

ii.  Start-ups[1] have been provided with exemptions to issue: (a) sweat equity shares up to 50% of their paid-up capital for the first five years from the date of their incorporation as opposed to the limit of 25% applicable to other companies; and (b) employee stock option plans to its employee/s being a promoter or a director who either directly or indirectly, holds more than 10% of the outstanding equity shares of the company for the first 5 (five) years from the date of its incorporation (which is not permitted in case of other companies);

iii.  There is no longer a requirement for all shares issued by way of preferential allotment to be fully paid up;

iv.  In case of preferential allotment of convertible securities, the price of the resultant shares (pursuant to conversion) is permitted to be arrived at either: (a) at the time of issuance of the convertible securities, based on the valuation report given at the time of the offer; or (b) within 30 days prior to the date when the holder is entitled to apply for shares (on conversion), based on the valuation report given no earlier than 60 days from such date. Provided that, the relevant time for determination of the price is required to be determined and disclosed by the company at the time of offer of the convertible securities;

v.  Security for “secured debentures” can now be created not only by the issuing company, but also by its subsidiaries, holding company or associates companies; and

vi.  A company intending to redeem its debentures prematurely is now permitted to transfer such amounts as are in excess of the prescribed limits to the Debenture Redemption Reserve, the adequacy of which has been now clarified to mean at least 25% of the value of the outstanding debentures rather than the value of debentures issued.

[1]     As defined in notification dated February 17, 2016 issued by the Department of Industrial Policy and Promotion.