The Ministry of Corporate Affairs (“MCA”) has amended the Companies (Share Capital and Debentures) Rules, 2014 (“Rules”) with effect from August 16, 2019. The amended Rules have altered provisions governing shares having differential voting rights (“DVR Shares”), provisions for issuance of Employee Stock Options (“ESOP”) and redemption of debentures.
Following are the key highlights of the amendment –
(i) “Consistent Track Record” no longer required to issue DVR Shares:
Before the amendment, a company could only issue DVR shares if it had a consistent track record of distributable profits for the last three years. This requirement has been omitted, a company is no longer required to have such track record to issue DVR shares.
(ii) Cap on Voting Power in respect of DVR Shares:
A restriction on voting power on DVR Shares has been put in place. Earlier, there was a restriction on issuance of DVR Shares, such shares could not exceed 26% of the total post-issue paid-up equity shares of a company, this restriction has been done away with. Following is the difference between the current position and the position prior to the amendment –
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Current Position |
Position prior to the amendment |
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Voting power in respect of shares with differential rights of the company shall not exceed 74%. of total voting power including voting power in respect of equity shares with differential rights issued at any point of time. |
Shares with differential rights shall not exceed 26% of the total post-issue paid up equity share capital including equity shares with differential rights issued at any point of time. |
(iii) Ease of Issuance of ESOPs for Start-ups:
As per the present framework, a company cannot issue ESOPs to –
(a) An employee who is a promoter or a person belonging to the promoter group; or
(b) A director who either himself or through his relative or through any body corporate, directly or indirectly, holds more than 10% of the outstanding equity shares of the company.
However, these restrictions were not applicable to start-ups registered with the Department for Promotion of Industry and Internal Trade (“DPIIT”), for a period of 5 years from the date of its incorporation or registration.
This exemption has been further enhanced, the requirements under (a) and (b) shall not be applicable to a DPIIT registered start-up for a period of 10 years from the date of its incorporation or registration.
(iv) Changes with respect to redemption of debentures:
All companies have to comply with the following in respect of debentures maturing during the year ending on the 31st day of March of next year –
(a) The limits with respect to adequacy of DRR shall be as under –
Debenture Redemption Reserve (“DRR”) means a reserve created by a company to repay the debentures issued by it. If a company meets the limits prescribed by the Rules, it is mandatory for the company to create a DRR. Following changes have been made with respect to this requirement –
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Current Position |
Position Prior to Amendment |
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DRR is not required for debentures issued by All India Financial Institutions regulated by Reserve Bank of India and Banking Companies for both public as well as privately placed debentures. |
This exemption was available prior to amendment. |
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For Public Issue of Debentures |
DRR, deposit or investment not required for –
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Adequacy of DRR was 25% of the value of outstanding debentures for registered NBFCs, registered HFCs and other listed companies. |
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For privately placed debentures issued by Listed Companies [Including Non-Banking Finance Companies (“NBFC”), other than All India Financial Institutions and Banking Companies] |
Creation DRR is not required for –
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For privately placed debentures issued by Unlisted Companies (Including NBFCs other than All India Financial Institutions and Banking Companies) |
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· DRR adequacy of 25% of the value of outstanding debentures for unlisted companies carrying out private placement of debentures.
· No DRR required for unlisted registered NBFCs and for registered HFCs carrying out private placement of debentures
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(b) Requirement to “Invest or Deposit”
All NBFCs registered with RBI, all listed and unlisted companies will have to invest or deposit, a sum which shall not be less than 15% of the amount of its debentures maturing during the year, ending on the 31st day of March of the next year in any one or more methods of investments or deposits as prescribed. Earlier, companies had to deposit or invest the amount before 30th day of April every year.
(v) Share Certificates may be signed by Company Secretary:
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Current Position |
Position prior to the amendment |
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A director or company secretary of a company is authorized to sign share certificates issued by a company. Both, the director and company secretary shall be personally responsible for permitting the affixation of their signature on a share certificate. |
Earlier, only the director could be authorized to sign share certificates issued by a company. |
Quick View
We believe that the Rules have been amended in order to
(a) Improve the ease of doing business in India,
(b) To ensure that there is an improvement in the business sentiments in the country,
(c) Further, the concept of DVR Shares has been introduced in order to enable promoters to retain control of their companies whilst expanding their capital base, and
(d) The new rules relating to ESOPs will help incentivize more start-ups to issue ESOPs. This will increase employee morale and confidence which will in turn, help the business of the start-up expand.
Disclaimer: This post has been prepared for informational purposes only. The information/or observations contained in this post does not constitute legal advice and should not be acted upon in any specific situation without seeking proper legal advice from a practicing attorney.