Transfer and issuance of securities by companies to comply with foreign exchange laws | India Inc. gets extension to hold AGM/EGM through VC/OAVM till December 31, 2022
Following significant changes have been introduced by MCA:
a. Declaration to be made if Government approval is required before transfer of shares;
b. No offer or invitation of any securities to be made to a body corporate incorporated in, or a national of, a country which shares a land border with India without obtaining Government approval under the foreign exchange laws.
The above changes have been analyzed in detail below:
A. Compliance with foreign exchange laws while transferring and issuing shares
a. Amendment to Companies (Share Capital and Debentures) Rules, 2014
Under Rule 11 of the Companies (Share Capital and Debentures) Rules, 2014 (Share Capital Rules), the instrument of transfer of securities held in physical form is required to be in Form No. SH-4 (Securities Transfer Form) and is required to be delivered to the company within 60 days from the date of such execution.
Now, the following declaration has been inserted in the Form SH-4:
“Transferee is not required to obtain the Government approval under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 prior to transfer of shares”;
“Transferee is required to obtain the Government approval under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 prior to transfer of shares and the same has been obtained and is enclosed herewith.”
As a result of the aforesaid amendment, it will be essential for the company to not take on record any transfer of shares which lacks compliance with the aforesaid declarations. The aforesaid amendment has been made vide the Companies (Share Capital and Debentures) Amendment Rules, 2022 dated May 4, 2022 (available here).
b. Amendment to Companies (Prospectus and Allotment of Securities) Rules, 2014 (PAS Rules)
Rule 14 of the PAS Rules inter alia provides that a company shall make an offer or invitation to subscribe to securities through private placement only if such proposal has been previously approved by the shareholders of the company. This will be done by a special resolution for each of the offers or invitations.
Now, MCA has incorporated a conditionality that no offer or invitation of any securities under Rule 14 will be made to a body corporate incorporated in, or a national of, a country which shares a land border with India. An exception is made for such body corporate or the national, as the case may be, who have obtained Government approval under the NDI Rules and attached such approval with the private placement offer cum application letter.
Further, now, the applicant will be required to declare, in Form PAS-4 (Private Placement Offer cum Application Letter), whether the Government approval under the NDI Rules is required or not and accordingly, tick the applicable provision:
“The applicant is not required to obtain Government approval under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 prior to subscription of shares“
“The applicant is required to obtain Government approval under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 prior to subscription of shares and the same has been obtained, and is enclosed herewith.”
The said amendment will cast responsibility on the company to ensure that no private placement is made in violation of the newly introduced prohibited category unless Government approval is taken. The aforementioned amendments have been introduced vide the Companies (Prospectus and Allotment of Securities) Amendment Rules, 2022 dated May 5, 2022 (available here).
B. Relaxation in holding of AGM and EGM through VC/ OAVM till December 31, 2022
In furtherance of the earlier relaxations granted by MCA in respect of holding of AGM through VC/ OAVM, MCA has now permitted companies whose AGMs are due in the year 2022, to conduct their AGMs on or before December 31, 2022, through VC/ OAVM. It has been clarified that this relaxation should not be construed as conferring any extension of time for holding of AGMs by the companies under Companies Act, 2013. The aforesaid relaxation has been granted vide General Circular No. 2/2022 dated May 5, 2022 (available here).
In case of EGMs, MCA has permitted companies to hold EGMs through VC/OAVM or transact items through postal ballot in accordance with the earlier circulars till December 31, 2022. The extension has been given vide General Circular No. 3/2022 dated May 5, 2022 (available here).
Disclaimer: The information provided in this update is intended for informational purposes only and does not constitute legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein. This update is not intended to address the circumstances of any particular individual or corporate body. There can be no assurance that the judicial/ quasi-judicial authorities may not take a position contrary to the views mentioned herein.