Report proposals’ impact on financing transactions

By Babu Sivaprakasam, Deep Roy and Megha Agarwal, Economic Laws Practice
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The Companies Act, 2013, is being implemented in a phased man- ner, with some provisions brought into force from September 2013, some from April 2014, and some yet to be notified. The 2013 act involved a major overhaul of the provisions of company law in India and, as a result, the imple- mentation of its provisions brought to light several practical challenges.

Though the Ministry of Corporate Affairs (MCA) had been actively issu- ing clarifications and amendments, a need was felt to constitute a committee to review the representations received from stakeholders. Accordingly, the MCA constituted the Company Law Committee, which submitted its report on 1 February. Some of the recom- mendations of the committee, which may impact nancing transactions, are discussed below.

Loans by companies

Subsequent to the enactment of section 185 of the 2013 act, an Indian company could not advance loans to its directors or to any other persons in whom its director is interested. Though the Companies (Meetings of Boards and its Powers) Rules, 2014, exempted the provision of loans by holding companies, and a notification dated 5 June 2015 exempted the provision of loans by certain private companies, the restriction under section 185 posed a great hurdle for genuine financing transactions.

Babu Sivaprakasam
Babu Sivaprakasam

The committee has now recom- mended that companies be permitted to advance loans to persons in whom the director is interested by passing a prior special resolution. This would enable the company’s shareholders to make a conscious decision and would also keep a check on the issue of siphoning off of funds. This however may not be a solution for a company where the promoter group has more than 75% of the share capital.

There was a request to allow Indian companies to provide loans to foreign entities without applying the Indian inter- est rate benchmarks prescribed under section 186 of the 2013 act. The commit- tee recommended that regardless of to whom the loan is advanced, the rate of interest in respect of the loan cannot be lower than the rate mentioned in section 186. One would have to bear in mind that loans advanced by Indian companies to foreign entities would also be subject to the safeguards prescribed by the Reserve Bank of India from time to time.

Registration of charges

The requirement of registering charges under the 2013 act has been the subject of a lot of debate. Section 77 of the 2013 act does not contain a speci fic list of charges required to be registered, in contradistinction to the corresponding provisions under section 125 of the Companies Act, 1956. This, along with the wide definition of the word “charge” under the 2013 act, led to confusion as to whether a pledge or a lien is also required to be registered with the Registrar of Companies (ROC).

Though pledges were exempted from registration under the 1956 act, by way of abundant caution, companies were registering pledges with the ROC under the 2013 act. It is interesting to note that form CHG-1 did not have an option for pledge (as a type of charge) and the filing was done under the head of “Others”. To resolve the difficulty faced in this regard, the committee has recommended that certain liens and pledges be exempted from the ling requirement under the 2013 act. This will reduce the operational dif culties that are faced by organizations in respect of such filings.

Acceptance of deposits

The committee also considered the suggestion that a speci c exemption be granted from the definition of “deposits” to unsecured loans provided by promoters pursuant to the requirement of lending institutions to bring in “quasi equity”. The committee however felt that the present exemption under the Companies (Acceptance of Deposits) Rules, 2014, is adequately worded.

Deep Roy
Deep Roy

The committee recommended allow- ing private companies in the infrastruc- ture sector to accept deposits from individual members, such as promoters, individuals or qualified institutional buy- ers, without any bar on the upper limit. Further, the committee suggested that startups be permitted to raise deposits from their members without being subject to the limits prescribed under the 2013 act, for the first five years from their incorporation.

As regards exemptions granted to secured debentures from the definition of “deposits”, the committee was of the view that there was no need to exempt debentures secured by second and third charges. However, the committee suggested that unsecured debentures listed as per the regulations framed by the Securities and Exchange Board of India be exempt from the definition of “deposits”.

The above recommendations of the committee have duly taken in account the interest of various stakeholders. It would be interesting to see the manner in which these recommendations are brought into effect by the legislature.

Babu Sivaprakasam is a partner, Deep Roy is an associate partner and Megha Agarwal is an associate at Economic Laws Practice. This article is intended for informational purposes and does not constitute a legal opinion or advice.

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