India: Corporate Law / MCA / SEBI: Exemption From Central Government Approval For The Payment Of Managerial Remuneration

Last Updated: 19 October 2012

Edited by Hitender Mehta

Exemption from Central Government approval for the payment of managerial remuneration

The Ministry of Corporate Affairs (MCA) vide Notification no. GSR 534(E) dated July 14, 2011 exempted the companies from obtaining the approval from the Central Government for payment of remuneration exceeding the limits imposed by the Companies Act, 1956 in respect of managerial persons not having any interest in the capital of the company and are not related to the directors or promoters thereof.

In continuation to the aforesaid notification, it has now been clarified by the MCA that any employee holding shares of the company up to 0.5% of paid up share capital thereof under any scheme formulated for allotment of shares to such employees including under Employees' Stock Option Plan or by way of qualification shares are also covered under the category of persons not having any interest in the capital of the company.

(Source: MCA Notification F. No. 14/11/2012- CL-VII dated August 16, 2012)

Delegation of powers of Central Government to Registrar of Companies

In supersession of MCA's earlier Notification no. G.S.R 222(E) dated March 17, 2011 with respect to delegation of powers and functions of Central Government to the Registrars of Companies (ROCs), the Central Government has now delegated its power and functions under the sections 21, 25, Proviso to Section 31(1), 108 (1D) and 572 of the Companies Act, 1956 to the ROCs, with effect from August 12, 2012, subject to the condition that the Central Government may revoke such delegation of powers or may by itself exercise the powers and functions under the aforesaid Sections, if in its opinion such a course of action is necessary in the public interest.

(Source: MCA Notification no. S.O. 1538(E) dated July 10, 2012)

Delegation of Powers of Central Government to Regional Directors

In supersession of MCA's earlier notification no. G.S.R 223(E) dated March 18, 2011 with respect to delegation of powers and functions of Central Government to the Regional Directors (RDs), the Central Government has now delegated power and functions under Sections 17, 18, 19, 22, 224 (3), 224(4), 224(7), 224(8a), 141, 188, 297(1), 394-A, 400, Second proviso to Section 439 (5), 439(6), 496(1)(a), 508(1)(a), 551(1), 555 (7b), 555 (9), 610 (1) and 627 of the Companies Act, 1956 to RDs, w.e.f. August 12, 2012, subject to the condition that the Central Government may revoke such delegation of powers or may by itself exercise the powers and functions under the aforesaid sections, if in its opinion such a course of action is necessary in the public interest.

(Source: MCA Notification no S.O. 1539(E) dated July 10, 2012)

Partial notification of Companies (Second Amendment) Act, 2002

With effect from August 12, 2012, the provisions of Section 7, 8 (in relation to Sections 18 & 19 of the Companies Act, 1956), 20 and 25 (in relation to Section 188 of the Companies Act, 1956) of the Companies (Second Amendment) Act, 2002 have come into force. Accordingly, the following amendments have taken place:

i) The authority governing the change in registered office of a company from one state to another has been shifted from Company Law Board to Central Government (Section 17 of the Companies Act, 1956).

ii) The relevant authority has been shifted from Company Law Board to Central Government (Section 18 & 19 of the Companies Act, 1956).

iii) The authority for rectification of register of charges has been shifted from Company Law Board to Central Government (Section 141 of the Companies Act, 1956).

iv) The authority to move application for non-circulation of certain statements along with notice of general meeting will be shifted from Company Law Board to Central Government (Section 188 of the Companies Act, 1956).

In all the above cases, the Central Government has delegated its power and functions to the concerned Regional Directors through Notification no S.O. 1539(E) dated July 10, 2012.

(Source: MCA Notification no. S.O. 1540(E) dated July 10, 2012)

Applicability of Service Tax on commission payable to Non- Whole Time Directors of a company u/s 309(4) of the Companies Act, 1956

In accordance with the Finance Act, 2012, since Non- Whole Time Directors of a company are not covered under the exempted list prescribed under the Finance Act, 2012, sitting fees/ commission payable to them by the company is also liable to service tax.

If such service tax is payable by the company, it will be deemed to be a part of the remuneration under Section 198 of the Companies Act, 1956 and would accordingly increase their remuneration. This remuneration could then exceed the limit 1% or 3% of the profit of the company, as the case may be, (in accordance with Section 309(4) of the Companies Act, 1956) and such increase of remuneration shall require approval of Central Government u/s 309 and 310 of the Companies Act, 1956. However, MCA has decided vide this circular that such an increase in the remuneration shall not require approval of the Central Government even if it exceeds the abovementioned limits for the financial year 2012-13.

(Source: MCA Circular no. 24/2012 dated August 9, 2012)

Clarifications to the Investor Education and Protection Fund (uploading of information regarding unpaid and unclaimed amounts lying with the companies) Rules, 2012

MCA has issued the following clarifications to the Investor Education and Protection Fund (uploading of information regarding unpaid and unclaimed amounts lying with the companies) Rules, 2012:

i) As per the said rules, information is to be filed in Form no. 5 INV and the cut-off date for filing information in Form 5 INV refers to the date of annual general meeting up to which the information relating to a particular year is to be updated and then filed.

ii) The companies are required to file one Form no. 5 INV each year for furnishing information on unpaid/ unclaimed amounts lying with companies as on the date of annual general meeting.

(Source: MCA Circular no. 17/2012 dated July 23, 2012)

Manner of achieving minimum public shareholding requirements in terms of Securities Contracts (Regulation) Rules

Securities and Exchange Board of India (SEBI) vide Circular nos. CIR/CFD/DIL/10/2010 dated December 16, 2010 and CIR/CFD/DIL/1/2012 dated February 8, 2012 provided for certain methods by way of amendments to the Equity Listing Agreement to enable listed companies to achieve minimum level of public shareholding. In continuation of the above circulars, SEBI has now, with a view to facilitate listed entities to comply with the minimum public shareholding requirements within the time specified in Securities Contracts (Regulation) Rules, 1957 (SCRR), inserted the following additional methods in clause 40A of the Equity Listing Agreement after item (d):

"(e) Rights Issues to public shareholders, with promoter/ promoter group shareholders forgoing their entitlement to equity shares, whether present or future, that may arise from such issue.

(f) Bonus Issues to public shareholders, with promoter/promoter group shareholders forgoing their entitlement to equity shares, whether present or future, that may arise from such issue.

(g) any other method as may be approved by SEBI, on a case to case basis."

The listed entities desirous of achieving the minimum public shareholding requirement through other means or seeking any relaxation from the available methods may approach SEBI with appropriate details and such requests would be considered by SEBI on the merits of each case. SEBI would endeavour to communicate its decision within 30 days from the date of receipt of such requests.

(Source: SEBI Circular no. CIR/CFD/DIL/11/2012 dated August 29, 2012)

Redemption of Indian Depository Receipts (IDRs) into underlying Equity Shares

SEBI vide Circular no. CIR/CFD/DIL/3/2011 dated June 3, 2011, had prescribed that the redemption of the IDRs, after the completion of one year from the date of issuance of such IDRs, shall be permitted only if the IDRs are infrequently traded on the stock exchange(s) in India. Now, in order to improve the attractiveness of IDRs as an instrument it has been decided to prescribe a framework for two-way fungibility of IDRs.

However, to retain the domestic liquidity, it has been decided to allow partial fungibility of IDRs (i.e., redemption/ conversion of IDRs into underlying equity shares) in a financial year to the extent of 25% of the IDRs originally issued.

(Source: SEBI Circular no. CIR/CFD/DIL/10/2012 dated August 28, 2012)

Redressal of investor grievances against listed companies

SEBI vide Circular no. CIR/OIAE/2/2011 dated June 3, 2011 implemented the system of SEBI Complaints Redress System (SCORES) advising all companies whose securities are listed on various stock exchanges to comply with the provisions of the said circular.

In this regard, all companies whose securities are listed on stock exchanges were required to obtain SCORES authentication by September 14, 2012 in terms of the aforesaid circular.

All companies against whom complaints are pending on SCORES, shall take appropriate necessary steps within 7-days of receipt of complaint by the concerned company through SCORES, so as to resolve the complaint within 30- days of receipt of complaint and also keep the complainant duly informed of the action taken thereon.

In case of failure to comply with the above, SEBI may take appropriate actions under the law.

(Source: SEBI Circular no. CIR/OIAE/1/2012 dated August 13, 2012)

Filing of forms along with the annual reports

Clause 31(a) of Equity Listing Agreement, inter-alia, requires listed companies to submit 6 copies of annual reports containing audited annual financial statements to the stock exchanges. Now, the SEBI has directed that the listed companies shall submit the following forms, as may be applicable, along with copies of annual reports submitted to stock exchanges:

i) Form A: Unqualified/ Matter of Emphasis Report

ii) Form B: Qualified/ Subject to/ Except for Audit Report

The format of these forms has been provided as an annexure to the circular. These forms shall be signed by (a) Chief Executive Officer / Managing Director, (b) Chief Financial Officer, (c) Auditor, and (d) Chairman of the Audit Committee. The information submitted as per these forms shall also be required to draw attention to relevant notes in the annual financial statements, management's response to qualifications in the Directors' Report and comments of the Board/ Chair of the Audit Committee. This circular is applicable to all annual audited financial results submitted for the period ending on or after December 31, 2012.

(Source: SEBI Circular no. CIR/CFD/DIL/7/2012 dated August 13, 2012)

Business Responsibility Reports

In July 2011, MCA had issued the 'National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business'. In line with the above Guidelines, it has been decided to mandate inclusion of Business Responsibility Reports ("BR reports") as part of the Annual Reports for listed entities. Accordingly, certain listing conditions have been specified by way of inserting Clause 55 in the Equity Listing Agreement.

The requirement to include BR Reports as part of the annual reports shall be mandatory for top 100 listed entities based on market capitalisation at BSE and NSE as on March 31, 2012. Other listed entities may voluntarily disclose BR Reports as part of their annual reports.

The provisions of this circular shall be applicable with effect from financial year ending on or after December 31, 2012. However, listed entities which are yet to submit their annual reports for financial year ended on March 31, 2012 may also include BR Reports as part of their Annual Reports on a voluntary basis.

(Source: SEBI Circular No. CIR/CFD/DIL/8/2012 dated August 13, 2012)

Amendment to definition of Qualified Foreign Investor (QFI) and QFI investment in debt mutual fund schemes which invest in infrastructure

The definition of QFI was amended via Circular CIR/ IMD/ FII&C/ 13/ 2012 dated June 7, 2012 wherein the explanation to the definition stated that phrases the term "Person" and "resident in India" shall carry the same meaning as under Foreign Exchange Management Act (FEMA), 1999 and the Income Tax Act, 1961.

However in consultation with Government of India and RBI, it has now been decided that the term "person" and the phrase "resident in India" shall carry the same meaning as defined under the Income Tax Act, 1961.

Further, vide SEBI Circular IMD/DF/14/2011 dated August 9, 2011 QFIs have been allowed to invest in mutual fund debt schemes which invest in infrastructure debt up to a total ceiling of USD 3 billion out of the total long term corporate infrastructure limits of USD 25 billion.

RBI vide its circular A.P. (DIR Series) Circular no. 135 dated June 25, 2012 had relaxed investment restriction for QFI investment in debt mutual fund schemes which invest in infrastructure.

Accordingly, QFIs can now invest in those debt mutual fund schemes that hold at least 25 percent of their assets (either in debt or equity or both) in the infrastructure sector under the USD 3 billion investment limit of debt mutual fund schemes which invest in infrastructure.

Monitoring and allocation of USD 3 billion limit of QFI investment in debt mutual fund schemes which invest in infrastructure shall be in the following manner-

In partial amendment to SEBI Circular IMD/DF/14/2011 dated August 9, 2011, QFI can invest without obtaining approval until the overall QFI investments reaches 90% (ninety percent) of USD 3 billion, i.e., USD 2.7 billion.

Terms and conditions related to monitoring, allocation, requirement of obtaining prior approval (after reaching 90% of investment limit) and reporting shall be as prescribed in circular CIR/IMD/FII&C/17/2012 dated July 18, 2012.

QFIs shall have to comply with provisions of the FEMA.

(Source: SEBI Circular No. CIR/ IMD/ FII&C/ 18/ 2012 dated July 20, 2012)

Investment by QFI in Indian Corporate Debt

SEBI vide its Circulars Cir/IMD/DF/14/2011 and Cir/IMD/FII&C/3/2012 dated August 9, 2011 and January 13, 2012 respectively had allowed QFIs to invest in schemes of Indian mutual funds and Indian equity shares subject to terms and conditions mentioned therein by opening a demat account with a qualified Depository Participant (DP). According to the present Circular, QFIs have now been allowed to invest in Indian corporate debt securities and debt schemes of Indian mutual funds.

(Source: SEBI Circular No. CIR/ IMD/ FII&C/ 17 / 2012 dated July 18, 2012)

Amendment to the Equity Listing Agreement -Platform for e-Voting by Shareholders of Listed Entities

Section 192A of the Companies Act, 1956, read with the Companies (Passing of the Resolution by Postal Ballot) Rules, 2001 ("the Rules") obligates the listed companies to conduct certain businesses only by way of postal ballot. Further, SEBI (Buy Back of Securities) Regulations, 1998, SEBI (Delisting of Equity Shares) Regulations, 2009, SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 and SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 require listed companies to pass certain additional businesses through postal ballot.

To enable wider participation of shareholders in important proposals, the listed companies are required to enable e-voting facility also to their shareholders, in respect of those businesses which are transacted through postal ballot by the listed companies. Initially, this requirement shall be applicable to top 500 listed entities at BSE and NSE, chosen based on the market capitalization computed as on the date of this circular. Accordingly suitable listing conditions have been specified in this regard and the Equity Listing Agreement has been amended by inserting a new clause 35B after clause 35A to provide evoting facility to its shareholders.

(Source: SEBI Circular no. CIR/CFD/DIL/6/2012 dated July 13, 2012)

Editorial Team: Bomi F. Daruwala, Gautam Chopra, Hemant Puthran, Rupesh Jain and Shilpi Shivangi

© 2012, Vaish Associates, Advocates,
All rights reserved with Vaish Associates, Advocates, 10, Hailey Road, Flat No. 5-7, New Delhi-110001, India.

The content of this article is intended to provide a general guide to the subject matter. Specialist professional advice should be sought about your specific circumstances. The views expressed in this article are solely of the authors of this article.

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