MCA revisits Share Capital and Debenture Rules, 2014 favourably

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Customer Care No. 91-11-45562222
MCA revisits Share Capital and Debenture Rules,
2014 favourably
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• 1. Introduction
• With almost 2.5 years elapsed after enforcing
  several provisions of Companies Act, 2013 (Act,
  2013) the Ministry of Corporate Affairs (MCA) is
  continuously revisiting and revamping the rules
  issued thereunder in order to align with policy
  initiatives or as a corrective measure in
  response to practical difficulties faced by
  corporate.
• The latest amendment by MCA has been vide the
  Companies (Share Capital and Debentures) Third
  Amendment Rules, 2016 (Amendment Rules). In this
  article we have analyzed the amendments by MCA.
• 2. Companies in default eligible to issue shares
  with differential rights after cooling-off period
• Rule 4(1) (g) of the Companies (Share Capital and
  Debentures) Rules, 2014 (Rules, 2014) expressly
  prohibits companies in default of payment of the
  dividend on preference shares or repayment of any
  tem loan from a public financial institution or
  State level financial institution or scheduled
  Bank that has become repayable or interest
  payable thereon or dues with respect to statutory
  payments relating to its employees to any
  authority or default in crediting the amount in
  Investor Education and Protection Fund to the
  Central Government from issuing equity shares
  with differential voting rights.

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• The amendment to Rule 4(1)(g) provides for
  a cooling-off period of 5 years in case if the
  default is made good by the company i.e. a
  company is permitted to issue such equity shares
  with differential voting rights upon expiry of 5
  years from which such default was made good. A
  complete prohibition throughout for companies in
  default under the said rule to issue equity
  shares with differential voting rights is now
  relaxed significantly with the grant of the
  cooling-off period.
• 3. Relaxation to Start-ups in issuing Sweat
  equity shares ESOPs
• Rule 8(4) of Rules, 2014 restricts companies from
  issuing sweat equity shares in excess of 25 of
  the paid up capital at any time and also limits
  the issuance of sweat equity shares per year to
  15 of the paid up capital or issue value of Rs.5
  crores whichever is higher.
• The amendment expressly allows notified Start-ups
  to issue sweat equity shares not exceeding50 of
  its paid up capital up to 5 years from the date
  of its incorporation or registration.However, the
  yearly limits of 15 of paid up capital or Rs.5
  crores whichever is higher has to be complied
  with.
• Further, in case of ESOPs, Rule 12 of Rules, 2014
  read with Section 62 (1)(b) of Act, 2013
  regulates the issuance of ESOPs by companies. The
  question of eligibility is well settled by the
  below Explanation provided under Rule 12(1) for
  the term 'Employee' as mentioned in Section
  62(1)(b)

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• Explanation
• For the purposes of clause (b) of sub-section (1)
  of section 62 and this rule ''Employee'' means-
• (a) a permanent employee of the company who has
  been working in India or outside India or
• (b) a director of the company, whether a whole
  time director or not but excluding an independent
  director or
• (c) an employee as defined in clauses (a) or (b)
  of a subsidiary, in India or outside India, or of
  a holding company of the company but does not
  include-
• i. an employee who is a promoter or a person
  belonging to the promoter group or
• ii. a director who either himself or through his
  relative or through any body corporate, directly
  or indirectly, holds more than ten percent of the
  outstanding equity shares of the company.
• The sub-clauses (i) and (ii) of clause (c)
  provides for the exclusion of promoter or a
  person belonging to the promoter group and a
  director holding more than 10 of outstanding
  equity shares directly or indirectly through his
  relative or through any body corporate from the
  ambit of the term 'Employees' while issuing
  ESOPs.
• The amendment exempts the application of the
  above sub-clauses (i) and (ii) for the notified
  Start-ups upto5 years from the date of
  incorporation or registration.

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