The new Company Law Act introduces several new anti-fraud safeguards. It defines various types of securities and extends disclosure and compliance norms to all securities. Several new provisions aim to prevent frauds like multiple demat accounts, non-disclosure of material information, and diversion of funds. Specific penalties have been introduced for such frauds including imprisonment and fines. The Act also strengthens rules around private placements, public offers, shareholder rights, debentures, corporate actions, ESOPs and buybacks to prevent misuse and increase transparency. Contentious areas around SEBI's jurisdiction and new compliance requirements are also addressed in the new law.

1. New Company Law
A Paradigm Shift

3. Financial System

4. ‘(h) “securities” include—
(i) shares, scrips, stocks, bonds, debentures, debenture stock or other
marketable securities of a like nature in or of any incorporated company or
other body corporate – eg. FCCB, GDR, OFCD
(ii) Derivative like call options, put options, swaps, etc..
(iii) units or any other instrument issued by any collective investment scheme to
the investors in such schemes Like MF units
(iv) security receipt under SARFESI
(v) units or any other such instrument issued to the investors under any mutual
fund scheme ( but excludes ULIPs)
(vi) any certificate or instrument (by whatever name called), issued to an
investor by any issuer being a special purpose distinct entity which
possesses any debt or receivable, including mortgage debt, assigned to
such entity, and acknowledging beneficial interest of such investor in such
debt or receivable, including mortgage debt, as the case may be;]
(vii)Government securities;
(viii) such other instruments as may be declared by the Central Government to
be securities; and]
(ix) rights or interest in securities;’

5. Norms Extended to all securities
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

Public offer
Private Placement
Transfer
Transmission
Maintaining Register
Compulsory Listing
Complying norms of Listing
Insider Trading

6. Norms Extended to all securities
 Dematerialisaton
 Minimum Subscription
 Allotment
 Nomination
 Role of Tribunal ‘
 Auditor’s Role

7. Greater Role of Government
• Private Placement within its purview
• Disclosures in Prospectus
• Norms for GDRs

8. Tussle between Government
and SEBI
• Section 24 prescribed
SEBI’s powers
• CG has tried to
encroach upon its
power
• Power of investigation
• SEBI debarred from
exercising powers
which are given to CG
under new Act

9. Anti Fraud Safeguards(AFS) –1
Fraud: Multiple Demat Accounts
 Stringent penalties for Fictitious
Application and Multiple Applications
 It is a fraud u/s 447
 Liable for 6 months -10 years
imprisonment
 Plus fine = amount of fraud upto 3
( amount of fraud)
 Plus Disgorgement

10. AFS2: Non Disclosures
F: In 2011, SEBI found that promoters and directors of
companies like Taksheel Solutions, RDB Rasyans,
Onelife Capital Advisors, Brooks Laboratories, PG
Electroplast, guilty of not make adequate disclosures in
their initial public offers
AFS:
 Government has retained powers to specify disclosures
 Any misstatement in prospectus constitutes a fraud – so fine and imprisonment
 Cognisable Offence
 Additional charges for damages in civil proceedings
 Unlimited liability of directors, experts, promoters, etc
 Person who authorised the issue – so even merchant bankers are under the garb

11. AFS3: Diversion of Funds
F: In most of cases stated in earlier slide, SEBI also found that companies
had diverted inter-corporate deposits to entities (mostly inter financial
intermediaries) that used the money to buy shares of these companies.
These shares, which were illegally procured, were sold at a premium to the
issue price on the first day of listing. It was also found that some of these
company had also wrongly utilised IPO proceeds to fund the losses incurred
by certain trading clients on the first day of listing. Merchant bankers and
QIBs were accessories to these frauds.
AFS: Section 27:
 Variation in terms of Prospectus or in terms of contracts only by special
resolution
 Cannot use IPO proceeds for trading in shares of listed companies
 Exit offer to shareholders

12. AFS 4: Frauds by Financial
Intermediaries
F: Misselling of financial Products is
rampant. Many advisors give false
promises of high returns.
AFS:
 Mis-selling is a fraud under company law
 Cognisable Offence
 It extends to any security
 Safeguards against mis-selling of mutual
funds is also included

13. AFS5: Sahara Case
F: In Sahara Case, huge funds were
collected ( to the extent of 25,000 cr and
above) By Sahara Group companies by
exploiting the ambiguities under old Act
AFS: Section 42 : Private Placement
1.
2.
3.
4.
New norms
Concept made crystal clear
Stringent provisions
Stringent penalties

14. Private Placement
•
•
•
•
•
•
Private Placement
Of securities
Select group of people
Private placement offer letter
Restriction of private placement in year
Restriction of shares acquired by private
placement
• Number of private placement

15. Private Placement
• Allotment Process
• Records and Disclosures
• Restriction of Fresh Offer

16. Prospectus
•
•
•
•
Disclosures as per Government directions
Shelf prospectus
Applicable for securities
Not applicable to GDR

17. Share Capital
• Types of shares unchanged
• Norms for preference shares changed
• Preference shares by infrastructure companies
can be redeemable beyond 20 years
• Disabilities on account of default in redemption
of preference shares – Like inability to buy back
• Voting Rights – no distinction between
cumulative and non cumulative voting rights

18. Variation in Voting Rights
• Consent of 3/4th or SR of the class
• New Safeguards for other shareholders

19. Analysis of New Safeguard
• The Act has inserted a proviso wherein now a
company needs to take into consideration the
wishes of other classes of shareholders whose
‘rights are affected’ by variation of rights of a
class of shareholders.
• Will the approval be required only if the change
has a negative impact on the shareholders? Or
will it be required even if the change has a
beneficial impact?

20. Analysis of New Safeguard
The meaning of the term ‘affect’ has to be explored
to answer these questions. Various dictionaries
have defined ‘affect’ as follows:
Black’s Law Dictionary, Bryan A. Garner, Ninth
Edition, 2009:
‘Most generally, to produce an effect on; to
influence in some way….’
Chambers 21st Century Dictionary:
‘to have an effect on someone or something.’

21. Transfer and Transmission
• Transfer of interest of member
• Transfer of securities
• Time limit for delivery of share certificate
cannot be extended
• Free Transferability of all securities of
public company
• Shareholders agreements recognised
• Power to approach Tribunal for
rectification restricted only to members

22. Debentures
• Unchanged Conditions
– convertible debentures after special
resolution
– DRRA
– Redemption
• Changed Conditions
– Failure to redeem
– Specific Relief
– Mandatory Appointment of Debenture Trustee
only above 500

23. Corporate Actions
• Shares at a Premium – 52
• Shares at a Discount cannot be issued
- interpreting discount to its price
• Powers to alter share capital – 61
- The approval of Tribunal is required if consolidation or
division of shares into shares of a larger amount results
in changes in the voting percentage of shareholders.
This is likely when a company has issued shares with
differential voting rights.

24. Rights Issue
• Offer can be kept open for a Maximum
period of 30 days
• This provision not extended to securities
• Provision is applicable to private
companies unless exempted
• No CG intervention if the company fails to
get SR

25. ESOP
• Director/officers/employees
– Company
– Holding company
– Subsidiary company
• ESOP can now be offered even to part
time and non executive director
• ESOPs cannot be issued to Independent
Directors

26. Sweat Equity
• Date of commencement important
• Definition of company changed

27. Sweat Equity
• Can a dormant company issue sweat
equity? - No
• Can one person company issue sweat
equity shares? • Can sweat equity shares be issued for
consideration other than cash to director?
• Can sweat equity shares be issued to
promoters?
• Can sweat equity shares be issued at
discount?

28. Sweat Equity
• When can sweat equity shares be issued? - ‘commenced
business’.
• However, under the new Act, the period of one year will
begin from the date the company has ‘commenced
business’.
• What constitutes commencement of business?
• Is the date of incorporation deemed to be the date of
commencement of business of the company? Or is it the
date when the declaration and verification are filed under
section 11 of the new Act?
• These questions are not answered in the Act. Thus, we
have to go to the dictionary meaning to assess its true
meaning.

29. • P Ramanatha Aiyer, - words commence and
commencement of business
• ‘Commence: to begin; to originate; to cause to
begin; perform the first act of, inter upon; to do
the first act in anything; to take the first step...’
• ‘Commence any business: “commence any
business” does not mean merely the business
for which the company was started, but any
transaction including, sale, purchase, etc. ”

30. Bonus Shares
• Additional Conditions can be issued by
Government
• Company cannot withdraw grant of bonus
once declared
• Defaults –
– payment of interest or principal in repect fixed
deposits
– Statutory dues

31. Reduction of Capital
•
•
•
•
•
•
•
•
Single Procedure
Representation of ROC/CG/SEBI
Certificate not a conclusive proof
Defaulters defaulting in repayment of deposits
are not entitled to discount
No “any reduced”
No specific authoritisation in Articles necessary
Auditors Certificate
Fraud on Creditors

32. Buy Back
• Subsequent buy back
– One Year For Both
Types Of Buy Back
• Defaults
– Subsisting
– 3 years thereafter
• Additional fetters
– Annual return
– Declaration/distribution
of dividend
– Financial statement
– Board report
– CFS
• Serious implication of
wring statements in
Declaration of
Solvency
• Odd lots

33. Thank you
• prachimanekar@gmail.com