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The Ministry of Corporate Affairs vide notification dated 16
August 2019, notified the Companies (Share Capital and Debentures)
Amendment Rules 2019 (Amendment Rules). The Amendment Rules have
amended the Companies (Share Capital and Debentures) Rules, 2014
(Original Rules).
The Amendment Rules have brought in certain relaxations with
respect to issue of shares with differential rights.
Erstwhile requirements to issue Equity shares with differential
rights
Under the erstwhile framework, a company could issue equity
shares with differential rights, provided inter alia, (i)
the shares with differential rights do not exceed 26% of the total
post issue paid up share capital (including equity shares with
differential rights); and (ii) the issuer company has a consistent
track record of distributable profit for the last three years.
Amendments in the Amendment Rules
Amendments in relation to issue of
shares with differential rights: The Amendment Rules have brought
in the following relaxations for issue of equity shares with
differential rights:
Voting power of shares
with differential rights upto 74% - The existing cap
of 26% of the post issue paid up equity share capital has been
replaced with a revised cap of 74% of the total voting power.
Three year' track
record - The Amendment Rules have done away with the
pre-requisite of distributable profits for the last three
years.
Exemption to Start-ups: As per Rule
12 of the Original Rules, the definition of the term
"Employee" did not include: (a) an employee who
is a promoter or a person belonging to the promoter group; or (b) a
director who either himself or through his relative or through any
body corporate, directly or indirectly, holds more than 10% of the
outstanding equity shares of the company. The start-up companies
(as defined in notification number G.S.R. 127(E), dated 19th
February 2019) were exempt from the foregoing conditions for a
period of 5 years. The Amendment Rules have increased the period of
exemption up to 10 years. This implies that employee stock option
(ESOPs) can be issued to such persons who would have otherwise not
qualified as eligible employees for ESOP purposes.
Observations
The existing laws restricted the issue of shares with
differential rights to a mere 26% of the post issue paid up
capital. This coupled with the profit history requirement certainly
limited such issues.
The Amendment Rules will now enable promoters of Indian
companies to retain control of their companies in their pursuit for
growth, even as they raise equity capital from global investors.
Moreover, the ESOP related amendment will be a big fillip for
promoters / founders of start-ups.
Overall, the above changes will provide far greater flexibility
while structuring investment deals. It should be interesting for
corporate India to start using these in deal constructs.
The content of this document do not necessarily reflect the
views/position of Khaitan & Co but remain solely those of the
author(s). For any further queries or follow up please contact
Khaitan & Co at legalalerts@khaitanco.com
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