Relaxations made to the definition of listed companies under Companies (Amendment) Act, 2021
The Central Government has introduced multiple measures aimed at improving the ease of doing business in India. In line with this intention, a significant set of amendments were made to the Companies Act, 2013 (Companies Act) through the Companies (Amendment) Act, 2021 (Amendment Act 2020).
One such amendments aim to tweak the definition of a listed company. As result, a proviso has now been added under Section 2 (52) of the Companies Act which deals with definition of listed companies. As per the proviso, the Central Government may, in consultation with the Securities and Exchange Board of India (SEBI), exclude from the definition of listed companies, certain classes of companies which have listed or intend to list a prescribed class of securities on any recognized stock exchange. This amendment was also suggested by the Company Law Committee in November 2019.
Amendment Act 2020 and its Implications
Earlier, as per Section 2(52) of the Companies Act, the definition of a listed company referred to any company which has its securities listed on a recognized stock exchange. The definition for securities is provided under the Securities Contract Regulation Act, 1956 (SCRA 1956). As per Section 2(h) of SCRA 1956, a security includes shares, scrips, stocks, bonds, debentures, debenture stock or any other marketable security.
As a result of the inclusive definition under the SCRA 1956 and Companies Act, private limited companies which had their debt securities listed on a stock exchange were compelled to follow the compliances applicable to the listed companies (viz., adhere to norms such as filing of returns, maintenance of records, appointment of auditors, appointment of independent director and women director, constitution of board committees, etc.), which are subject to more stringent requirements as compared to unlisted companies.
However, with effect from 1 April 2021, as per Section 2(52) the Companies Act read with the newly inserted Rule 2A of the Companies (Specification and Definition Details) Rules, 2014, following classes of companies will now be excluded from the definition of listed companies:
- Public companies which have not listed their equity shares on a recognized stock exchange but have listed non-convertible debt securities issued on private placement basis in terms of SEBI (Issue and Listing of Debt Securities) Regulations, 2008, and/or non-convertible redeemable preference shares issued on private placement basis in terms of SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013
- Private companies which have listed their non-convertible debt securities on private placement basis on a recognized stock exchange in terms of SEBI (Issue and Listing of Debt Securities) Regulations, 2008
- Public companies which have not listed their equity shares on a recognized stock exchange but whose equity shares are listed on a stock exchange in a foreign jurisdiction as specified in sub-section (3) of section 23 of the Companies Act
As a result of the Amendment Act 2020 and w.e.f. April 1, 2021 the above mentioned companies will now benefit from a major compliance relief such as filing of returns, maintenance of records, appointment of auditors, appointment of independent director and women director, constitution of board committees etc. amongst other stringent requirements.
Another critical implication of the Amendment Act 2020 is amendment under Section 23(3) of Companies Act. The amendment now empowers the Central Government to allow certain class of public companies to list classes of securities on a permissible foreign jurisdiction without any simultaneous listing in India. While the amendment is not yet effective, it will provide relief to listed foreign companies from compliance requirements applicable to listed companies under the Companies Act 2013.
The move to include relaxations in the definition of listed companies will, to a large extent, make it easier for smaller companies to approach debt markets, in turn boosting the listing of debt securities. The move also lays out the road for domestic companies to tap foreign equity markets in a comparatively hassle free manner. The impetus to growth is very welcome at this stage of the economy where an attempt at recovery is being made in the post-covid era.
Consultation paper on proposed IFSCA (Issuance and Listing of Securities) Regulations, 2021
International Financial Services Centres Authority (IFSCA) has been established to develop a comprehensive and consistent regulatory framework based on global best practices with a special focus on ease of doing business, proposed to enact an all-encompassing framework to facilitate issuers' access to the global markets.
IFSCA on March 10, 2021 has released a draft public consultation paper on IFSCA (Issuance and listing of securities) Regulations, 2021 and introduced a range of listing options in IFSC through IPO, FPO, Start-up/SME listing, SPAC, DRs, bonds and so on.
Towards this objective, IFSCA proposes an integrated regulatory framework specifying the requirements for (i) issuance and listing of various types of securities and (ii) preliminary and continuous disclosures as a unified regulator to develop and regulate financial products, financial services, and financial institutions in the International Financial Service Centres (IFSCs) in India.
Cross-border listing helps a company meet its corporate financial needs by identifying foreign stock exchange. The market practices and the regulatory framework keeps changing which is wh,y there was a need to review the existing regulatory framework for listing of securities with IFSC, so that they can be aligned with the latest market developments and therefore, the best practices can be adopted.
IFSCA has proposed regulations for issuance and listing of various entities in IFSC in India. Section 23(3) of the Companies Act, 2013 enables listing of equity shares of public Indian companies in permissible foreign jurisdictions which also includes IFSC. IFSCA is a unified regulatory authority for development and regulation of financial products, financial services, and financial institutions in the IFSC in India. Presently, listing of equity in IFSC by Indian companies incorporated and in foreign jurisdiction is governed by a combination of regulations under SEBI (IFSC) Guidelines, 2015, SEBI (Issue of Capital and Disclosure requirements) Regulations, 2018, Companies Act, 2013 and Foreign Currency Depository Receipt Scheme and circulars issued thereunder. IFSCA had also prescribed regulatory framework for listing of Depository Receipts (DR) in IFSC Exchange.
The Finance Minister in the Union Budget for the financial year 2021-22, has announced setting up of a 'world-class' fintech hub at GIFT City in a bid to bolster innovation in the fintech industry.
Listing of securities in IFSC
IFSCA is proposing to enable the listing of start-ups in IFSC to provide an ecosystem for fintech companies. Recently, there have been new methods for raising capital, such as raising it through Special Purpose Acquisition Companies (SPAC). To keep pace with the evolving market environment, IFSCA is proposing suitable framework for capital raising and listing of SPACs on the recognized stock exchanges, to facilitate sponsors, raise capital to undertake an acquisition of a company or assets.
IFSCA proposes to issue regulatory framework for IPO of specified securities by an unlisted issuer, a follow-on public offer of specified securities by a listed issuer, listing of specified securities by a start-up or SME, secondary listing, an IPO of specified securities by a SPAC, listing of depository receipts and lastly listing of debt securities. The regulation gives eligibility criteria and salient features for the different listings. There are underlying principles for an issuer to list its securities in IFSC, such as:
- Material information being disclosed must be true and correct so that the investor can make an informed decision
- There should be full, accurate and timely disclosure of financial results, risk and other non-financial information which might be important
- The standard of quality operations, management experience and expertise should be maintained
- The directors of issuers must make sure to act in the interests of the shareholders as well as stakeholders
The objective of this consultation paper is to seek comments/views from public on the proposed regulations for issuance and listing of various securities in IFSC in India. The proposed framework shall facilitate issuers from across jurisdictions to raise capital for variety of needs and list their securities at the international stock exchanges in IFSCs.
Framework for processing of e-mandates for recurring online transactions
In August 2019, the Reserve Bank of India (RBI) issued a framework for processing e-mandates on recurring online transactions. The framework, which was initially limited to cards and wallets, was expanded in January 2020 to include Unified Payments Interface (UPI) transactions. The RBI had advised stakeholders in December 2020 to migrate to the system by March 31, 2021, based on a proposal from the Indian Banks' Association (IBA) for an extension of time to allow banks to complete the migration.
The RBI extended the deadline to comply with the framework until September 30, 2021, giving banks and payment aggregators a six-month reprieve.
Many banks have not upgraded their capacities to comply with RBI's criteria for allowing registration, monitoring, alteration, and withdrawal of e-mandates, and the millions of e-mandates set up by customers could have failed as of April 1, 2021. While the RBI extended the deadline for processing recurring online transactions, it also stated that non-compliance would be penalized.
The primary objective of the framework was to protect customers from fraudulent transactions and enhance customer convenience. The framework mandates the use of Additional Factor of Authentication (AFA) during registration and the first transaction (with relaxation for subsequent transactions up to a cap of INR 2,000, which has since been increased to INR 5,000), as well as pre-transaction notification, the ability to revoke the mandate, and other features in the interest of consumer convenience and protection in the use of recurring online payments. Despite the extension, the Banks still failed to implement the framework, which, as per the RBI, has 'given rise to a situation of possible large-scale customer inconvenience and default.'
Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021
The Central Government has promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 (Ordinance) to allow pre-packaged insolvency resolution process for corporate debtors classified as micro, small or medium enterprises (MSME) under the Micro, Small and Medium Enterprises Development Act, 2006.
The Ordinance alters the Insolvency and Bankruptcy Code, 2016 (Code) to enable the Central Government to notify a pre-packaged procedure for defaults of up to INR 1 crore. In the aftermath of the Covid-19 pandemic, the Centre briefly stopped the start of new insolvency proceedings on March 24, 2020. This suspension, which had been extended on many occasions, came to an end on March 24, 2021. A separate chapter, Chapter 3A, has been inserted in the Code to deal with the pre-packaged insolvency resolution process.
A pre-packaged settlement entails a corporation working out a restructuring agreement with its creditors before applying for bankruptcy protection. This helps to reduce the overall time and expense of the process. An application for initiating a pre-packaged insolvency resolution process may be made in respect of a corporate debtor, subject to the following conditions:
- It has not undergone pre-packaged insolvency resolution process or completed corporate insolvency resolution process, as the case may be, during the period of three years preceding the initiation date
- It is not undergoing a corporate insolvency resolution process
- No order requiring it to be liquidated is passed under section 33
- It is eligible to submit a resolution plan under section 29A
- The financial creditors of the corporate debtor, not being its related parties, representing such number and such manner as may be specified, have proposed the name of the insolvency professional to be appointed as the resolution professional for conducting the pre-packaged insolvency resolution process of the corporate debtor, and the financial creditors of the corporate debtor, not being its related parties, representing not less than 66%
- The majority of the directors or partners of the corporate debtor, as the case may be, have made a declaration, in a form that may be specified, as to the limitation period along with a declaration of no intent to commit fraud
- The members of the corporate debtor have passed a special resolution, or at least 3/4th of the total number of partners, as the case may be, of the corporate debtor has passed a resolution, approving the filing of an application for initiating pre-packaged insolvency resolution process
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