1. NEW COMPANIES ACT MIGHT DENT PROFITS OF FIRMS RELYING ON REVALUATION RESERVE

Under the new Companies Act, 2013 depreciation of an asset has to be taken as the cost of an asset or ‘other amount substituted for cost’. Revaluation reserve is the amount added to the original acquired value of an asset in order to show its true market value. Any company may choose to revalue its fixed assets from its original acquired value to market value, provided such revaluation is done for all the assets forming part a class of such assets.”For instance, if a company chooses to revalue its buildings, it will have to do so for all ‘buildings’ owned by the company.

The old Companies Act, 1956, along with a guidance note issued by the Institute of Chartered Accountants of India in 1982 allowed companies to show old figures of depreciation prior to revaluation of the asset concerned in profit and loss account. This was done by an accounting method of transferring a higher amount of depreciation due to the changed value of asset from revaluation reserve and then nullifying it. Thus, if the depreciation charge due to revaluation was Rs 10, companies were allowed to take this much amount from the ‘revaluation reserve’ in their profit and loss account and nullify it. Consequently, such depreciation due to revaluation would not affect the companies’ profits. For example, Ashok Leyland transferred about Rs 15 crore from its revaluation reserve of Rs 1,296 crore to its profit and loss account in FY14. However, under the new Companies Act, 2013, depreciation of an asset has to be taken as the cost of an asset or ‘other amount substituted for cost’. This means, for the purposes of computing profits, depreciation will include additional charge arising out of revaluation of assets. Experts are, however, divided over the applicability of the 1982 guidance note now. If the companies are not able to recoup their additional depreciation from the revaluation reserve – as prescribed by 1982 guidance note – they will have to take a substantial hit in their profits. Consequently, it will hit their dividends and managerial remuneration. In the absence of any such guidance note, the new law does not allow any money to be transferred from the revaluation reserve in order to recoup the depreciation.

2. ICAI SEEK MORE CHANGES TO COMPANIES ACT 2013 FOR EASE IN DOING BUSINESS

NEW DELHI: To make doing business easier, chartered accountants’ grouping ICAI has sought more changes in norms governing companies, including those pertaining to related party transactions. The Institute of Chartered Accountants of India (ICAI) has suggested changes in various aspects of the Companies Act, 2013, whose most provisions came into force from April last. With regard to proposed changes, the institute has communicated with the Corporate Affairs Ministry which is implementing the Act. ICAI President Manoj Fadnis said some concerns with respect to related party transactions norms are yet to be addressed. “We are talking about the concept of ease in doing business… The Ministry has been very receptive,” he told PTI. Noting that certain concerns have already been taken care of and some are in the process of being addressed, Fadnis said For the institute, the main concern about related party norms is that a company cannot appoint an auditor if his or her relatives hold shares in that particular firm. “If you look at the social fabric, many of the times such information (about shareholding in companies) are not shared between the relatives… So their shareholding should not be a criteria for qualification of a chartered accountant to be an auditor,” Fadnis said. To address the issue, the institute has suggested that the norms should mention “dependent relatives” only. Welcoming the Ministry’s latest clarification on companies taking deposits, Fadnis said the move would provide a “lot of relief” for many smaller private limited companies in terms of ensuring compliance with the norms. “It is a good step and it should help a large number of smaller private limited companies to ensure compliance. “Otherwise the law required that certain kinds of deposits were to be repaid by March 31, 2015 and many of these companies did not have funds available to repay those deposits,” Fadnis said. On Monday, the Ministry said that amounts received by private firms from its members, directors or their relatives prior to April 1, 2014, would not considered as deposits under the new companies law. To ease practical difficulties faced by stakeholders, the government has already moved a Companies (Amendment) Bill, 2014. The changes have been approved by Lok Sabha and is now awaiting Rajya Sabha nod. As per the Ministry, some of the amendments are aimed at further facilitating ease of doing business. On the proposed National Financial Reporting Authority (NFRA), Fadnis said there needs to be more deliberations on the matter. ICAI has raised concerns about setting up the new body.

3. MODES OF RAISING FINANCE THROUGH PRIVATE PLACEMENT UNDER COMPANIES ACT, 2013

Under Law, there are different modes of raising finance available to the Company which can be through borrowings made from Public/Private Financial Institutions, Public/Private Bodies, Secured/Unsecured borrowings, issuance of shares through private placements, rights issue, further issue of capital, According to Section 185 of the Companies Act, 2013 no company can directly or indirectly advance any loan to any body corporate, the board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the board, or of any director or directors, of the lending company. Further as per Rule 10 of Companies (meetings of Board and its Powers) Rules 2014 any loan made by a holding company to its wholly owned subsidiary company is exempted from the requirements of section 185 of the Companies Act, 2013. However, a loan by holding company to its other subsidiaries (other than WOS) falls within the ambit of section 185. In addition to the above, Section 186 of Companies Act, 2013provides the provisions for Loan and Investment made by the Company. As per Section 186 a company can directly or indirectly (a) give any loan to any person or other body corporate (b) give any guarantee or provide security in connection with a loan to any other body corporate or person; and (c) acquire by way of subscription, purchase or otherwise, the securities of any other body corporate, upto sixty per cent of its paid-up share capital, free reserves and securities premium account or one hundred per cent. of its free reserves and securities premium account, whichever is more. And in case such a transaction exceeds the limits specified, prior approval by means of a special resolution passed at a general meeting shall be necessary. The company shall disclose to the members in the financial statement the full particulars of the loans given, investment made or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilised by the recipient of the loan or guarantee or security. Such investment shall be made or loan or guarantee or security given by the company only upon the resolution of Board of directors sanctioning it is passed at a meeting of the Board with the consent of all the directors present at the meeting and the prior approval of the public financial institution concerned where any term loan is subsisting, is obtained. Prior approval of a public financial institution shall not be required where the aggregate of the loans and investments so far made, the amount for which guarantee or security so far provided to or in all other bodies corporate, along with the investments, loans, guarantee or security proposed to be made or given does not exceed the limit and there is no default in repayment of loan installments or payment of interest thereon as per the terms and conditions of such loan to the public financial institution. No loan shall be given under this section at a rate of interest lower than the prevailing yield of one year, three year, five year or ten year Government Security closest to the tenor of the loan. No company which is in default in the repayment of any deposits accepted before or after the commencement of new act Act or in payment of interest thereon, shall give any loan or give any guarantee or provide any security or make an acquisition till such default is subsisting. This provision of this section (except sub-section 1) shall not apply to any acquisition of shares allotted in pursuance of clause (a) of sub-section (1) of section 62 (right issue). Where a loan or guarantee is given or where a security has been provided by a company to its wholly owned subsidiary company or a joint venture company, or a acquisition is made by a holding company, by way of subscription, purchase or otherwise of securities of its WOS the requirement of special resolution (in case of exceeding the limit) is not required. In the light of aforesaid we deal with the methods available with the corporate for availing funds :I. Private Placement of Securities (other than public issue) A Company willing to raise funds through private placement of securities needs to comply with the provisions of Section 42, the Companies Act 2013. Here, securities include – shares, scrips, stocks, bond, debenture, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate1 etc. To pursue this rote for raising finance, the company shall adhere to the following:

• Company to make private placement through issue of ‘private placement offer letter'(form PAS- 4).
• Offer or invitation to be made to such number of person not exceeding two hundred^I in a financial year.
• Fresh offer or invitation to be made only after allotments with respect to any offer or invitation made earlier have been completed, withdrawn or abandoned.
• Money payable towards subscription of securities be paid through cheque/DD or other banking channels but not by cash.
• Allotment of securities to be made within 60 days from the date of receipt of application money.
• If company fails to allot the shares within 60 days application money needs to be repaid within 15 days from the date of completion of 60 days. Failure to such refund within 15 days shall make company liable to repay that money with interest @ 12 p.a.
• The application money received shall be kept in a separate bank account in a scheduled bank and shall not be utilized for any purpose other than for adjustment against allotment of securities or for the repayment of monies where company is unable to allot securities.
• Private placement offer/invitation shall only be made to such persons whose name are recorded by the company prior to invitation to subscribe the securities.
• Company to maintain record of Private placement in form No. PAS -5.
• Complete information about such offer to be filed with ROC within 30 days of circulation of relevant private placement offer.
• Upon allotment Return of allotment shall be filed with ROC along with list of security holder (Form PAS-3).
• Failure to comply with the provisions of section 42 shall make the company, its promoters and directors liable for penalty which may extend to the amount involved in the offer or invitation or two crore rupees whichever is higher.
• Each offer or invitations needs to be previously approved by the shareholders of the company by a special resolution and explanatory statement to the notice of the general meeting shall contain the basis or justifications for the price at which offer or invitation is being madeⁱⁱ .
• In case of invitation for Non-Convertible Debenture(NCD) it shall be sufficient if company passes a previous special resolution only once in a year for all the offers or invitation for such debenture during the yearⁱⁱⁱ .

II. Right Issue [Section 62 (1) (a) the Companies Act 2014] : Where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered to persons who, at the date of the offer, are holders of equity shares of the company in proportion, as nearly as circumstances admit, to the paid-up share capital on those shares by sending a letter of offer subject to the following conditions:-

• the offer shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days and not exceeding thirty days from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined;
• unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any other person; and the notice referred above shall contain a statement of this right;
• after the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered, the Board of Directors may dispose of them in such manner which is not dis-advantageous to the shareholders and the company;

III. Preferential Allotment of shares: [Section 62 (1) (c) of the Companies Act, 2013]: Share means share in the capital of the company and includes stock^iv. The share capital of the company limited by shares shall be of two kinds namely (a) equity share capital (b) preference share capital. For the purpose of this Section “share or other securities” means equity shares, fully convertible debentures, partly convertible debentures, or any securities, which would be convertible into or exchanged with equity shares at a later date^v. Following are the requirements to pursue with this mode:

• Authorization through special resolution is required.
• Price of such shares to be determined by the valuation report of a registered valuer.
• Price of listed company shall not be required to be determined by the valuation report of a registered valuer.
• Issue of shares on preferential basis should also comply with the conditions laid down in Section 42 above (private placement)^vi .
• For unlisted Companies preferential offer shall be made subject to the compliance with the following requirement.
• Issue is authorized by AoA and by special resolution
• Securities allotted shall be made fully paid up at the time of their allotment.
• Allotment to be completed within 12 months from the date of passing of special resolution.
• Price of shares or other securities shall be determined on the basis of registered valuer.
• Where convertible securities are offered with option to convert in to equity shares, the price of the resultant shares to be determined before hand on the basis of valuation report.
• In case of allotment of shares or other securities for consideration other than cash, such consideration shall be done by registered valuer.
• Prescribed disclosure in the explanatory statement to be mentioned. Viz.
  • Object of the issue
  • Total no. of securities offered
  • Price/price band
  • Basis of price along with valuation report
  • Class/classes of person to whom allotment is proposed to be made
  • Intention of promoters, directors or KMP to subscribe the offer
  • Proposed time for completion of allotment
  • Names of proposed allottees and percentage of post preferential offer
  • Likely change in control in the company consequent to the offer
  • Number of persons to whom allotment in preferential basis have already been made during the year.
  • Justification for allotment of proposed to be made for consideration other than cash and valuation report.
  • Pre and post issue shareholding pattern of the company in prescribed format.

IV. Issue of Debenture:[Section 71 of the Companies Act, 2013. : “Debenture” includes debenture stock, bond or other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not. To issue debentures a company shall adhere to the following:

• A company may issue dentures with option to convert such debentures into shares, either wholly or partly at the time of redemption.
• Provisions of private placement of securities (Section 42) need to be complied with if debenture proposed to be issued through private placement.
• In addition to above, provisions Section 62 needs to be complied with if Issues of convertible debenture are through Preferential allotment.
• Issue of denture with option to convert into shares (wholly or partially) shall be approved by a special resolution passed at general meeting.
• Debenture cannot be issued carrying voting rights.
• Debenture Redemption Reserve (DRR) account needs to be created out of the profits of the company available for the payment of dividend.
• DRR shall be created for the amount equivalent to at least fifty percent of the amount raised through the debenture issue before redemption commences^vii .
• An amount which is not less than 15 % of the amount of debentures maturing during the year shall be invested or deposited as per prescribed method viii.
• Debenture Trustee needs to be appointed if company for issue of denture, issues a prospectus or makes an offer or invitation to the public or its member exceeding 500 hundred for subscription of debenture.
• Company needs to pay interest and redeem the debentures in accordance with the terms and conditions of their issue.

Additional Conditions for issue of Secured Debenture:

• Date of redemption of secured debenture shall not exceed 10 years from the date of issue. (infra structure company can issue debenture with redemption period up to 30 years)
• Debenture shall be secured by creation of charge on the properties/assets of the company having sufficient value due for repayment of amount of debenture and interest thereon.
• Company shall appoint a debenture trustee before issue of prospectus or letter of offer for subscription.
• Debenture trust deed to be executed not later than sixty days after the allotment.

V. Issue of Preference shares [Section 55 of the Companies Act, 2013] : A Company willing to issue the preference shares shall keep in mind the following:

• Company not eligible to issue pref. shares which are irredeemable.
• Issue of Pref. shares to be authorized by AOA of the Company.
• Company can issue only those pref. shares which are redeemable not exceeding 20 years from the date of its issue. (exemption to infrastructure company)
• A company engaged in the setting up and dealing with Infra project may issue pref. shares for a period exceeding twenty years but not exceeding thirty years, subject to the redemption of a minimum ten percent of such preference shares per year from the twenty first years onwards or earlier, on proportionate basis, at the option of the pref. shares holders.
• Issue of Pref. shares to be authorized by a special resolution in the General meeting.
• There should not be subsisting default in payment of dividend on existing pref. shares.
• Resolution authoring the issue of pref. shares to set out matter as prescribed under rules^ix .
• Explanatory statement to the notice to include the matter as prescribed under rules^x

VI. Acceptance of Deposit from its members by the Company [Section 73 of the Companies Act, 2013] : Deposit includes any receipt of money by way of deposit or loan or in any other form by a company but does not includes the item enumerated in the Companies (Acceptance of Deposits) Rules, 2014. As per the deposit rules Any amount received by a company form any other company does not amount to a deposit. A Company willing to raise funds in this mode shall keep in mind the following:

• A company can by passing of a resolution in general meeting can accept deposit form its members subject on such terms and conditions, including the provision of security, if any, or for the repayment of such deposits with interest, as may be agreed upon between the company and its members.
• Following Conditions needs to be fulfilled:
  • issuance of a circular to its members including therein a statement showing the financial position of the company, the credit rating obtained, the total number of depositors and the amount due towards deposits in respect of any previous deposits accepted by the company and such other particulars in such form and in such manner as may be prescribed (Form DPT-1);
  • filing a copy of the circular along with such statement with the Registrar within thirty days before the date of issue of the circular;
  • depositing such sum which shall not be less than fifteen per cent. of the amount of its deposits maturing during a financial year and the financial year next following, and kept in a scheduled bank in a separate bank account to be called as deposit repayment reserve account;
  • providing such deposit insurance in such manner and to such extent as may be prescribed;
  • certifying that the company has not committed any default in the repayment of deposits accepted either before or after the commencement of this Act or payment of interest on such deposits; and
  • providing security, if any for the due repayment of the amount of deposit or the interest thereon including the creation of such charge on the property or assets of the company:
  • Provided that in case where a company does not secure the deposits or secures such deposits partially, then, the deposits shall be termed as ”unsecured deposits” and shall be so quoted in every circular, form, advertisement or in any document related to invitation or acceptance of deposits.
• The deposit repayment reserve account shall not be used by the company for any purpose other than repayment of deposits.

Footnotes1.Section 2 (h) of the Securities Contracts (Regulation) Act, 1956 i.i Rule 14, Companies (Prospectus and Allotment of Securities) Rules, 2014.ii. Rule 14, Companies (Prospectus and Allotment of Securities) Rules, 2014iii. Rule 14, Companies (Prospectus and Allotment of Securities) Rules, 2014iv. Section 2(84) of the Companies Act, 2013v. Rule 13, Companies (Share Capital & Debenture) Rules, 2014.vi. Rule 13 (1), Companies (Share Capital & Debenture) Rules, 2014vii. Rule 18 Companies (Share Capital & Debenture) Rules, 2014viii. Rule 18 Companies (Share Capital & Debenture) Rules, 2014ix. Rule 9 Companies (Share Capital & Debenture) Rules, 2014x. Rule 9 Companies (Share Capital & Debenture) Rules, 2014The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.