The MCA amends share capital and debenture rules and documents to be submitted by airline companies

First Notes The MCA amends share capital and debenture rules and documents to be submitted by airline companies 8 August 2016 First Notes on Financial Reporting Corporate law updates Regulatory and other information Disclosures Sector All Banking and Insurance Information, Communication, Entertainment Consumer and Industrial Markets Background The Ministry of Corporate Affairs (MCA) has been issuing various amendments/clarifications to the Companies Act, 2013 (2013 Act) and the corresponding Rules to remove practical impediments faced by companies while its implementation. New developments On 19 July 2016, MCA through its notifications issued the following: 1. Companies (Share Capital and Debentures) Third Rules, 2016 (the Rules) 2. Modification/exception to Section 381 of the 2013 Act: Accounts of foreign company. 1. Companies (Share Capital and Debentures) Third Rules, 2016 The following table provide an overview of the amended Rules: Rules amended Overview Infrastructure and Government Relevant to All Audit committee CFO Others Transition Immediately Within the next 3 months Post 3 months but within 6 months Post 6 months Rule 4(1)(g) New proviso inserted Rule 8(4) New proviso inserted Equity shares with differential rights: Currently, a company limited by shares can issue equity shares with differential rights as to dividend, voting or otherwise, only if the company complies with the conditions as prescribed in Rule 4(1). Further, Rule 4(1)(g) prohibits a company from issuing such shares if it has defaulted in payment of dividend or term loans from financial institutions, etc. The amended Rule has inserted a proviso to Rule 4(1)(g) which allows a company to issue equity shares with differential rights upon expiry of five years from the end of the financial year in which such default was made good. Issue of sweat equity shares: Currently an unlisted company can issue sweat equity shares to its directors or employees at a discount or for consideration other than cash provided conditions of Rules are complied with. The company shall not issue sweat equity shares for more than 15 per cent of the existing paid-up equity share capital in a year or issue value of INR5 crores, whichever is higher. However, the issuance of sweat equity shares in the company shall not exceed 25 per cent of the paid-up equity capital of the company at any time. The amended Rule provides a relaxation from the above limits for a 1

First Notes 8 August 2016 Rules amended Overview (Continued) start-up company, (as defined in notification number GSR 180(E) dated 17 February 2016 issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India). A start-up company may issue sweat equity shares not exceeding 50 per cent of its paid-up capital up to five years from the date of its incorporation or registration. Rule 12(1)(c)(ii) New proviso inserted Issue of employee stock options: Currently an unlisted company cannot offer shares to an employee who is a promoter or a person belonging to the promoter group, or a director who either himself or through his relative or through any body corporate, directly or indirectly, holds more than 10 per cent of the outstanding equity shares of the company. The amended Rules provides relaxation to a start-up company from the above conditions up to five years from the date of its incorporation or registration. Rule 13(2)(c) omitted Issue of shares on preferential basis: An unlisted company can issue shares/other securities on preferential basis only on the basis of conditions prescribed in the Rules. One of the condition in the Rule 13(2)(c) states that the securities should be fully paid-up at the time of allotment by the company. The above condition in the Rule 13(2)(c) has been omitted i.e. now such securities can be partly paid-up at the time of allotment. Rule 13(2)(h) Issue of shares on preferential basis: Currently in the case of convertible securities offered on a preferential basis with an option to apply for and get equity shares allotted, the price of the resultant shares is determined beforehand on the basis of a valuation report of a registered valuer along with complying with the provisions of Section 62 of the 2013 Act. The amended Rules provides that the price of the resultant shares pursuant to conversion should be determined in either of the following ways: i. upfront at the time when the offer of convertible securities is made, on the basis of valuation report of a registered valuer given at the stage of such offer, or ii. at the time, which shall not be earlier than 30 days to the date when a holder of convertible security becomes entitled to apply for shares, on the basis of valuation report of a registered valuer given not earlier than 60 days of the date when the holder of convertible security becomes entitled to apply for shares. However, the company is required to take a decision on the above options at the time of offer of convertible security itself and make such disclosures as prescribed under Rule 13(2)(d)(v). Rule 15 Notice to Registrar for alteration of share capital: Currently, a company needs to file a notice with the Registrar in case of: alteration of share capital under Section 61(1) of the 2013 Act redemption of preference shares, or order passed by the government increasing the authorised capital of the company under Section 62(4) read with Section 62(6) of the 2013 Act. Additionally, a notice to Registrar would need to be filed in case of a company not having share capital increases the number of its members. 2

First Notes 8 August 2016 Rules amended Rule 18(1)(b) and 18(1)(d) Overview (Continued) Debentures: Currently, a company can issue debentures only if it meets certain prescribed conditions. One of the condition under Rule 18(1)(b) is that debentures are secured by the creation of a charge, on the properties or assets of the company, having a value which is sufficient for the due repayment of the amount of debentures and interest thereon. Rule 18(1)(d) requires that such charge or mortgage is created in favour of the debenture trustee on any specific movable property of the company (not being in the nature of pledge). The amended Rules provide that a company can issue debentures only if, inter alia: such an issue of debentures is secured by the creation of a charge on the properties or assets of the company or its subsidiaries, its holding company or its associates companies, having a value which is sufficient for the due repayment of the amount of debentures and interest thereon. the security for the debentures by way of a charge or mortgage is created in favour of the debenture trustee on any specific movable property of the company or its holding company or subsidiaries or associate companies or otherwise. (Emphasis added to present changes) Rule 18(7)(ii) and 18(7)(iii) Debentures: Currently, a company is required to create a Debenture Redemption Reserve (DRR) for the purpose of redemption of debentures as per conditions prescribed in the Rules. Following are the modified Rules: i. For Non-Banking Financial Companies registered with the Reserve Bank of India (RBI) under Section 45-IA of the RBI () Act, 1997, the adequacy of DRR will be 25 per cent of the value of outstanding debentures issued through public issue as per present SEBI (Issue and Listing of Debt Securities) Regulations, 2008, and no DRR is required in the case of privately placed debentures. ii. For other companies including manufacturing and infrastructure companies, the adequacy of DRR will be 25 per cent of the value of outstanding debentures (earlier only value of debentures was given) issued through public issue as per present SEBI (Issue and Listing of Debt Securities), Regulations 2008 and also 25 per cent DRR is required in the case of privately placed debentures by listed companies. For unlisted companies issuing debentures on private placement basis, the DRR will be 25 per cent of the value of outstanding debentures. (Emphasis added to present changes) Additionally, a company which intends to redeem its debentures prematurely, may provide for transfer of such amount in DRR as is necessary for redemption of such debentures even if it exceeds the above mentioned limits as per the amended Rules. 3

First Notes 8 August 2016 2. Modification/exception to Section 381 of the 2013 Act: Accounts of foreign company (airlines) Current requirements As per Section 381 of the 2013 Act, every foreign company shall, in every calendar year: a) make out a balance sheet and profit and loss account in such form, containing such particulars and including or having annexed or attached thereto such documents as may be prescribed, and b) deliver a copy of those documents to the Registrar. However the Central Government (CG) may, by notification, direct that, in the case of any foreign company or class of foreign companies, the requirements of clause (a) shall not apply, or shall apply subject to such exceptions and modifications as may be specified in that notification. Overview of the recent notification The CG has directed that the requirement of above mentioned clause (a) of Section 381 of the 2013 Act shall apply to a foreign company which is an airlines company having a share capital, subject to the following exceptions and modifications: 1. Submission of following documents by an airlines company in respect of the period ending on or after the 31 March 2016 to the appropriate Registrar of Companies (ROC) in India shall be deemed to be sufficient compliance with the provisions of above mentioned clause (a): i. Documents relating to copies of latest consolidated financial statements of the parent foreign company, as submitted by it to the prescribed authority in the country of its incorporation under the provisions of the law for the time being in force in that country. ii. A certified translation in English need to be annexed in case such documents are not in the English language. In respect of its Indian business operations, a statement of receipts and payments for the financial year, duly authenticated by a practicing Chartered Accountant in India or a firm or a Limited Liability Partnership of practicing Chartered Accountants in India. iii. The documents required to be filed with ROC under Rule 4(2) of the Companies (Registration of Foreign Companies) Rules, 2014 such as statement of related party transactions, statement of repatriation of profits, etc. 2. Additionally, the company should furnish to the CG such information with regard to its accounts as required by the CG. Our comments Companies (Share Capital and Debentures) Third Rules, 2016: The Report of the Companies Law Committee issued in February 2016 recommended all of the above amendments to the Rules. Therefore, the above MCA amendments depict the regulator s efforts to help ensure a smooth transition of the 2013 Act. Modification/exception to Section 381 of the 2013 Act - Accounts of foreign company (airlines): The amendments are significant for the foreign airline companies as they relax the requirements for submitting financial statements under Indian GAAP to the Registrar and allow them to submit their group s consolidated financial statements instead. These amendments are similar to the relaxations given to the airline companies under the Companies Act, 1956. 4

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KPMG in India s IFRS institute KPMG in India is pleased to re-launch its IFRS institute - a web-based platform, which seeks to act as a wide-ranging site for information and updates on IFRS implementation in India. The website provides information and resources to help board and audit committee members, executives, management, stakeholders and government representatives gain insight and access to thought leadership publications that are based on the evolving global financial reporting framework.. IFRS Notes SEBI issues a consultation paper on disclosure of financial information in offer document/placement memorandum and valuation of the units of Infrastructure Investment Trusts 20 July 2016 The Securities and Exchange Board of India (SEBI) issued a consultation paper on 15 June 2016, proposing continuous financial disclosures and other continuous disclosures to be made by Infrastructure Investment Trusts (InvITs) registered under the SEBI (Infrastructure Investment Trusts) Regulations, 2014 (InvIT Regulations). Continuing with its recommendations, SEBI on 8 July 2016, issued a consultation paper proposing the following: Guidelines for financial disclosures in the offer document/placement memorandum Valuation of the units of InvITs. This issue of IFRS Notes aims to provide an overview of the SEBI consultation paper. Missed an issue of Accounting and Auditing Update or First Notes? Issue no. 11/2016 Healthcare This month the Accounting and Auditing Update focusses on the healthcare sector and highlights key matters relating to accounting, financial reporting and regulatory areas relevant to this sector. Our articles on Indian Accounting Standards (Ind AS) highlight key areas of impact such as revenue recognition, accounting of property, plant and equipment, consolidated financial statements (including acquisition of businesses), segment reporting, etc. and explain Ind AS requirements relating to the sector. The publication also features a interactions with senior members of two leading companies in this sector; Dr. Om Prakash Manchanda, Whole-time Director and Chief Executive Officer and Mr. Dilip Bidani, Chief Financial Officer, Dr. Lal Pathlabs Limited; Mr. Krishnan Subramanian, Group Chief Financial Officer, HealthCare Global Enterprises Limited. Our conversation with them explore some key accounting, reporting and other topical matters relevant to the sector. This publication also carries an article on the proposed Goods and Services Tax (GST) and provides an overview on the likely impact of GST on the healthcare sector. We also seek to highlight recently introduced sections of the Income-tax Act, 1961 and potential benefits that Finance Act, 2016 provides to the sector. Additionally, in this publication, we lay emphasis on considerations and challenges that companies in this sector could face while implementing Internal Financial Controls. Our publication also carries a regular synopsis of recent regulatory updates. The MCA notifies NCLT and NCLAT Rules, 2016 8 August 2016 Recently, on 21 July 2016, MCA has notified the rules corresponding to the sections relating to NCLT/NCLAT (The Rules). They are as follows: 1. National Company Law Tribunal Rules, 2016 (NCLT Rules) and 2. National Company Law Appellate Tribunal Rules, 2016 (NCLAT Rules). The Rules came into force from 21 July 2016 i.e. the date they have been published in the official gazette of India and provide the procedures that companies would be required to follow while making an application to the NCLT/NCLAT along with the manner in which the cases would be disposed of by the NCLT/NCLAT. Our issue of First Notes provides an overview of the above Rules. KPMG in India is pleased to present Voices on Reporting a monthly series of knowledge sharing calls to discuss current and emerging issues relating to financial reporting. In our recent call, on 11 July 2016, we covered following topics: 1. SEBI provides certain relaxation for Ind AS compliant quarterly results 2. The MoF announces deferment of ICDS by one year 3. Ind AS implementation issues. Feedback/queries can be sent to aaupdate@kpmg.com Previous editions are available to download from: www.kpmg.com/in The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. This document is meant for e-communication only.